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REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Midstream Week Thoughts: Remote Detonation

While many office workers were remote this week, the market had its worst week since 2008.  This led to another week of staggering losses in midstream and oil prices.  MLPs actually outperformed utilities and the DJIA this week and were roughly inline with the S&P 500 decline.

The selling, whether forced or not, gave way to some bounces late in the week for midstream stocks, but it wasn’t enough to avoid another double-digit decline week for the indexes. 

Decisive action by TRGP on its dividend, after years of inaction, was met with a positive market reaction.  Expect others to announce distribution cuts in the coming weeks to help stabilize balance sheets as we limp along in these uncertain times. 

With oil prices at their lowest levels in more than 18 years, it seems like we all know the outlook for production and volume growth directionally, but specifics remain dependent on the duration of the economic shutdown and the willingness of OPEC and Russia to step back in to support oil prices.  Bank revolvers will be redetermined in the coming month and we have a good sense of the direction that will go, but it’s uncertain how willing banks will be to offer time to cure deficiency payments. 

In the absence of clarity, selling has been relentless.  There is a floor to valuation, especially for the country’s large irreplaceable pipeline systems.  But that system includes upstream-oriented assets that will see declines in capacity, and discerning quality within midstream is not a priority for the market at the moment. 

More Records

This week, the AMZ added 3 more top 10 worst days to the list, followed by 2 top 10 best days ever.  Summing it all up made for the 4th worst week ever, even after bouncing 27% since Wednesday’s close.

The AMNA added 3 more top 10 worst days to its list, followed by 2 top 10 best days ever.  The end result was the second worst week ever for the AMNA, even after bouncing 20% since Wednesday’s close.

6 of the top 10 all time worst days for the AMZ and 5 of the 10 worst days for AMNA have happened in the last 3 weeks.

While not nearly enough to combat the losses, we have had 3 of the top 10 best days ever for AMZ and AMNA in the last 2 weeks.

4 of the 10 worst weeks ever for AMZ, all in a row.  For AMNA 3 of the last 4 weeks have been the top 3 worst weeks on record for that index.

What Would Clark Griswold Do?

I had a long road trip planned for Spring Break this year.  Those plans have been canceled, like little league baseball, the school play, my 20-year high school reunion, and a bunch of other stuff.  There are many fun road trip movies to watch though, including the classic “National Lampoon’s Vacation” featuring Clark Griswold and his family. 

Clark’s move in each film is (1) to start off with a bunch of enthusiasm about a trip or family gathering, (2) have none of it go according to plan, (3) have a mental breakdown, and (4) somehow have it turns out ok at the end, after lowering his expectations.  I think we can all related to nothing going to plan after this first full week of quarantine mode, with bored kids, anxious spouses and frustrating technology.

While it’s not Christmas, National Lampoon’s Christmas Vacation has perhaps the Clark meltdown that is most applicable to how it feels to be invested in midstream (or really any equity) at the moment.  Late in the film, Clark gets that wild look in his eye and snaps.

Because of movie magic, after Clark cracks up, things always sort of come together for him and he’s able to have a family moment like he’s been trying to have the whole film.  I’m not saying I expect similar magic to solve the market overnight, but it does feel hard to picture things getting worse from here.  Many of us probably would have said that 20% ago (or last week), too, which is the challenge in picking bottoms amidst this daily volatility.  We can only try to be like Clark and soldier on.

Winners & Losers

MLPs

MLPs outperformed other midstream stocks this week, helped by some major green shoots Thursday and Friday off of very depressed prices.  There were 4 MLPs with positive performance week over week, mostly smaller names like OMP, NGL and HEP.  SRLP again outperformed as an MLP that has stayed off the radar of institutional investors and is supported by mostly retail investors.  On the downside, there were many ugly performances this week, but SMLP was the worst at nearly 60%.

PBFX repeated in the bottom 5 this week, a staggering -37% after -50% last week, very unusual for a stock with no direct commodity price exposure and no company specific news.  SRLP repeated in the top 5, while SMLP went from top 5 to bottom 5.  On the YTD leaderboard, SRLP takes over the top spot, with EVA and CAPL holding on to top 5 spots as well.  SMLP replaced OMP in the bottom 5, all 5 of which are down 80%+ in less than 3 months.

Midstream Corporations

The midstream corporation group underperformed this week.  Being a part of the S&P 500 was not a help to the likes of WMB and OKE in a sharply negative market.  ETRN was the lone positive name, although Cheniere continues to hold up better of late and was nearly flat.

ETRN, TGE and LNG repeated in the top 5.  TRGP repeated in the bottom spot.  OKE didn’t fare too much better, as its stunning fall from grace continues.  On the YTD leaderboard, the best performer in the group is down more than 35%, so WMB makes the top 5 down “just” 50%.

Canadian Midstream

Canadian midstream corporations outperformed U.S. midstream, but they were still much more volatile than they have been in recent years.  GEI, TRP and ENB outperformed again, while IPL and KEY were each down 25%+.

On the YTD leaderboard, every stock is down 30% or more (in USD terms), but the largest names TRP and ENB are well ahead of the rest of the group.

News of the (Midstream) World

The first of this round of dividend cuts came this week with TRGP.  EPD maintained its distribution.  Other news was mostly around producers reducing capex and midstream companies following suit.  Notably news was MPC decided to maintain status quo, while WMB appeared to be preparing to fend off M&A or activist approaches.

Capital Markets

  • None.

Growth Projects / M&A

  • Several midstream companies reduced capex plans in response to the significant decline in oil prices
    • Inter Pipeline (IPL-CA) expects to reduce 2020 capex by C$60-120mm (press release)
    • Pembina (PPL-CA) lowered 2020 capex to C$1.2-1.4bn compared to prior C$2.3bn plan (press release)
      • Jordan Cove received FERC approval
    • Keyera (KEY-CA) 2021 capex is expected to decrease to C$400-500mm (press release)
    • Targa Resources (TRGP) cut net growth capex to $800-900mm from $1.2-1.3bn and can have capex of as low as $200mm in 2021 (press release)
    • EnLink (ENLC) reduced 2020 capex plans to $225-285mm from $315-425mm (press release)
    • Hess Midstream (HESM) reduced 2020 expansion capex to $260mm from $335mm (press release)
  • Marathon Petroleum (MPC) announced it will maintain its current midstream structure, with the company remaining the GP of MPLX, stating that the midstream value is already unlocked and that MPC receives significant value from MPLX (press release)
    • MPC also named Michael Hennigan (current MPLX CEO) as new CEO (press release)

Other

  • Several large producers announced large reductions in capex plans for 2020, including CPE, PXD, CXO, HES, WTI, KOS, PVAC, EQT, and CDEV, among others
  • Williams Companies (WMB) announced adoption of limited duration stockholder rights agreement to deter potential activist investors (press release)
  • TRGP cut its dividend by 90%, EPD maintained its quarterly distribution