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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Viewed 2602 times

Week Thoughts: Record Pace for Midstream

Midstream was slightly positive and MLPs were slightly negative in this short trading week. Canadian Midstream helped AMNA outperform AMZ and AMUS this week. AMNA is approaching 20% YTD return. Oil prices rallied again, marching back towards $60/bbl, so did natural gas and NGLs. But that wasn’t enough to get U.S. midstream moving higher. It may be cognitive bias, but it feels like whenever MLP correlation with oil prices breaks down, its because MLPs are underperforming, not outperforming.

#Blessed

The narrative this week may have been hangover from Targa’s lower outlook and higher capex, but we shouldn’t lose sight of how well midstream has held gains after the strong run, despite opportunities along the way to give it back. In fact, the Alerian MLP Index has never produced a better return to start the year to this date. See every year on record ranked in the chart below. Like when a player is batting over .400 in June, obviously there is a whole lot of season left, but this could be the year it sustains.

Strong 4Q results from Energy Transfer is also more meaningful to the market than Targa déjà vu on capex and funding challenges. Solid results from a few others this week (ENLC, CEQP, ENBL, USAC) were also encouraging. ET’s results blew expectations away, and the conference call didn’t seem to raise concerns. Yet after a brief spike, ET’s stock price faded quickly, which is frustrating for ET holders. But as noted above, after the strong start to the year, the market selling the news isn’t a shock.

Targa: (A Substantial Portion of) Funding Secured

“Capital blessings” became a midstream meme this week, when Targa CEO Joe Bob Perkins chided analysts and investors for complaining about Targa’s incessant capital spending, saying he views capital creep as capital blessings that will lead to a stronger company upon completion. Investors probably would have less concern if TRGP wasn’t also paying out more than 100% of its current cash flow and issuing equity on its ATM.

TRGP’s commentary and guidance shouldn’t come as a surprise to anyone after TRGP’s last few years of big spending and annual financing imrovisation. Both TRGP management and TRGP bulls remind me of Aunt Bethany in Christmas Vacation, when the family asks her to say Grace and she doesn’t quite get it, until Uncle Lewis yells in her face, “They want you to say Grace! The bless-ing!”. Perhaps this week’s actions and reactions can serve as a wake up call in the voice of Uncle Lewis for TRGP and its fans.

The wild swing in TRGP sentiment from euphoria Tuesday to confusion Wednesday and anger Thursday was interesting, but not indicative of the sector as a whole. TRGP’s premium asset footprint gives them enough of a pass to avoid pursuing a different business model. The majority of the sector is aggressively improving leverage and payout ratios and targeting “Midstream 2.0” financial guardrails. TRGP is the same as it ever was, which isn’t good enough.

Winners & Losers

NBLX, USAC and DKL posted 4Q results this week, which probably led to their outperformance.  NBLX’s outlook made up for weaker 4Q.  ENBL posted strong results Tuesday, but it finished the week in the bottom 5.  SHLX and HEP 4Q results were lackluster, and the market punished them for it.  Unclear what the issue was with CQP this week, but the Cheniere complex reports Tuesday, so maybe things will be different next week.

No repeats in the bottom or top 5 week over week.  On the YTD leaderboard, GMLP fell a few spots and TGP joined the top 5.  On the bottom 5, still only one MLP with negative total return for the year, and HEP replaced MMP in the bottom 5.

General Partners and Midstream Corporations

U.S. midstream corporations outperformed MLPs this week.  KMI led the group, trading up as Chairman Richard Kinder continues to purchase shares in the open market.  ENLC posted solid results and traded well (not as well as its former sponsor DVN).  TRGP was the big loser this week after spiking 5% Monday and then falling 12.5% the last 3 days of the week.

ENLC and WGP repeated near the top of the group this week.  On the YTD leaderboard, OKE took the top spot from TRGP, which fell out of the top 5 entirely.  ENLC replaced TRGP, WMB and KMI moved up a few spots.

Canadian Midstream

There were some rare fireworks in the Canadian midstream group this week, when Keyera rallied more than 10% Friday after strong 4Q results and closed the week well out in front of the rest of the group.  TRP and ENB outperformed as well, which helped the entire Canadian midstream group outperform U.S. corporations and MLPs.

Pembina lagged the group this week and gave up the top spot on the YTD leaderboard.  Keyera took over the top spot, and now 4 of the 7 names are up 20%+.

News of the (Midstream) World

Big news of the week was TRGP’s latest complicated partial asset sale.  Beyond that, news was pretty light.  No IDR elimination progress this week, none expected next week with the likes of SMLP, CQP, and BPMP unlikely to announce any changes.   We got some action in the debt market this week, with some large high yield issuance across two deals, both upsized.

Capital Markets

  • Antero Midstream (AM) priced an upsized private placement offering of $650mm of 5.75% senior unsecured notes due 2027 at par (press release)
    • Upsized from $600mm
  • USA Compression Partners (USAC) priced an upsized offering of $750mm of 6.875% senior notes due 2027 at par (press release)
    • Upsized from $500mm
  • EnLink Midstream (ENLC) entered into equity distribution agreement to sell up to $400mm of common equity at-the-market (filing)

Growth Projects / M&A

  • Targa Resources (TRGP) announced the sale of a 45% interest in its North Dakota (Badlands) assets to funds managed by GSO Capital Partners and Blackstone for $1.6bn in cash (press release)
    • TRGP will continue to be the operator and will hold majority governance rights of the assets
    • Future growth capital is expected to be funded on a pro rata basis
    • The assets are located in the Bakken and Three Forks Shale plays of the Williston Basin and include 480 miles of crude oil gathering pipelines, 125,000 barrels of operational crude oil storage, 260 miles of natural gas gathering pipelines, and the Little Missouri natural gas processing plant with a current gross capacity of 90 MMcf/d

Other

  • FERC approved Venture Global’s Calcasieu Pass LNG export project in Louisiana using streamlined approval process, sets up potentially faster approvals going forward (press release)
    • First LNG export project to receive approval in 2+ years
  • Canada’s National Energy Board (NEB) renewed support of Trans Mountain pipeline expansion with proposed changes to protect endangered Killer Whale population (CBC)