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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Risk On, Game On for Midstream

Midstream overall had a strong week, keeping pace with the S&P 500 as it reached fresh all-time highs Thursday after the Fed’s commentary was seen as bullish on expectations of a 2019 rate cut.  MLPs underperformed after strong relative gains last week. 

Oil found a bottom and bounced hard, helped by the first positive inventory reduction in several weeks, the expectation of lower interest rates, and the rising threat of conflict with Iran.  While it’s just the threat of potential supply disruption in the Middle East, there was a very real supply disruption in Padd I gasoline on Friday when the largest refinery complex on the East Coast exploded. 

Natural gas prices had no such threat or actual supply disruption and tumbled back to multi-year lows.  NGL prices showed signs of life just as sentiment on NGLs among midstream investors peaked. Company-specific news was light on the week, but midstream companies were actively marketing their stories to investors at a major energy conference in New York, which may have helped with positive action this week.

Top Heavy

The sector is feeling top heavy these days, with big S&P 500 names KMI, OKE, and WMB plus TRP in Canada in Canada dominating YTD performance.  It’s kind of like the NBA draft this year, where beyond the 3rd pick, there wasn’t much to get excited about, at least for casual fans.

I grew up much more than a casual fan of sports, even if I wasn’t ever good at playing them.   Lucky enough to have family with season tickets to the Rockets and Oilers,  I read biographies of Ted Williams, Bo Jackson and Mugsy Bogues.  In high school, Sportcenter and Baseball Tonight were constantly on in the background while I studied.  I was editor of the sports page of the school newspaper and even had a short-lived column called Hindsight.  In college, I worked at Minute Maid Park for a summer selling beer and cracker jacks.

As life filled up with work, wife and kids, sports eventually faded way into the backgound.  So much so that for a few years, I didn’t even have ESPN and couldn’t imagine sitting through an entire baseball game.  I became just a casual fan, with only a passing interest in sports.  

The stock market’s interest in midstream as its own asset class has similarly faded in recent years.  Casual fans of midstream can’t be bothered to own MLPs any more, and certaintly can’t be bothered to dig in and try to figure out which of MLPs beyond the few big ones to own.

New Generation of Fandom

A strange thing happened this year: my youngest son became a rabid sports fan.  It started with him joining me in the garage gym early most mornings.  There’s a rim on the wall where he can practice shooting baskets, but after a while it gets boring. 

To keep him from being bored (and to keep him coming to the garage gym with me), I ordered the NBA package on the Roku and let him scroll through highlights of the prior night’s games. Over time, that built on itself, and he fell in love with several players that casual fans wouldn’t know much about. 

Now that the NBA season is over, we’ve started watching Sportcenter instead and he’s suddenly a fan of baseball players Cody Bellinger and Christian Yelich, players I didn’t even know before this year.   At this point, he’s all in on any sport, and its really fun for both of us.  See below for a picture of him with two-time NCAA National Champion and current Dallas Mavs guard Jalen Brunson at his camp this week.

“They’ll Blow It!”

As part of the ramping sports obsession in my house this summer, my son and I watched Major League II this weekend.  The original is rated R, the sequel is PG, so seemed more appropriate.  Major League II has a 5% score on Rotten Tomatoes, it’s objectively a terrible movie, espcially compared with 82% scored by the original. 

There is one character in the film that rings true for midstream investors: the surly played by Randy Quaid.  He starts the season excited for the Indians prospects.  Then as it becomes clear the Indians suck again, he becomes the team’s biggest hater.  He becomes so cynical that when the team wins the pennant, he jeers at the cheering crowd and yells “They’ll blow it in the playoffs.”

Some investors with a voice on the Internet have shifted from die-hard fans of midstream into haters, and with some good reason given the preventable bad outcomes investors have experienced in recent years.

But casual fans have already returned to midstream, ramping stock prices of big names that casual fans can easily access.  It remains to be seen if a fresh group of midstream fans can be developed into die-hard fans of the space who care about the smaller, nuanced stories in the space.  The fan base needs a fresh generation of investors that can get excited enough about midstream to go searching for the midstream equivalent of Utah Jazz guard Donovan Mitchell (in 2018 it was probably CEQP).

Winners & Losers

Large MLPs EPD and PAA both traded well last week and helped AMZ outperform other midstream indexes with higher exposure to corporations.  This week, they finished roughly flat and fellow large MLP MMP was down, which led to lackluster returns for AMZ relative to those other midstream indexes this week.

SMLP bounced back this week to lead all MLPs.  PBFX rallied on Friday, with its sponsor seen as a direct beneficiary of the refinery explosion in Philadelphia.  Another refinery-sponsored MLP PSXP made the top 5 this week as well, perhaps on follow-up from the recent midstream announcements from last week. 

CINR reacted negatively to its CEO resignation early in the week.  Other stocks in the bottom 5 had no news.  Stock action this week may have been impacted by the Alerian Index rebalance announced last week and options expiration.

Week over week, SMLP went from worst to first, NBLX went from bottom 5 to top 5.  GLP repeated in the bottom 5.  On the YTD leaderboard, no change among the top 5, all of which have produced 35%+ total return.  NRP joined the bottom 5 YTD after its drop this week. 

Midstream Corporations

ETRN reacted very positively this week to the proposed land swap and updated timeline/budget for the Mountain Valley Pipeline project.  Better NGL pricing this week may have helped OKE and TRGP.  Cheniere traded well presumably on positive conference meetings and ongoing reassurance that low global LNG prices won’t have a lasting impact on its results.  Private infrastructure fund-backed midstream companies ENLC and TGE struggled to keep pace this week. 

ETRN and OKE repeated near the top this week and TRGP recovered last week’s losses.  TGE, ALTM, and SEMG repeated near the bottom.  On the YTD leaderboard, KMI broke 40% total return, OKE broke 30% and pulled into second overall just ahead of WMB.  Cheniere is now up more than 15% on the year.  Among the worst performers, ALTM remains by far the worst, but TGE and SEMG are also negative for the year.

Canadian Midstream

Canadian midstream corporations tend to trade more on fundamentals than fund flows relative to the U.S. midstream names.  Higher oil prices and lower interest rates helped Canadian midstream post universal gains this week, led by Gibson Energy at 6%, perhaps seen as a beneficiary of the Trans Mountain Expansion approval on the need for more operational storage.  The largest names (TRP and ENB) underperformed, but still posted gains for the week.

GEI made it two straight weeks at the front of the group, helping to close the gap on YTD total return.  Only KML is negative for the year, all others have posted 10%+ total returns.

News of the (Midstream) World

No blockbuster transactions announced this week, but some incremental progress on the largest pipeline projects being developed.  Also, extensive reporting but no official announcements on export facilities in the Corpus area being developed or potentially changing hands.  Also, the MLP Parity act gets re-introduced a few years too late to catch the strong MLP valuations and capital markets.

Capital Markets

  • Enviva Partners (EVA) filed S-3 to register up to $500mm worth of equity securities, also registered 15.3mm units for selling unitholders, including 13.6mm for G.P. (filing)

Growth Projects / M&A

  • EQM Midstream (EQM) announced land exchange proposal that would grant the Federal Government full ownership of private lands that cross the Appalachian Trail (press release)
    • In exchange, the applicable federal agencies would grant MVP an easement and right-of-way to cross the trail
    • The land exchange is subject to approval of respective federal agencies
    • EQM now expects a mid-2020 full in-service date for the Mountain Valley Pipeline project at an overall cost of $4.8-5.0bn
  • Reuters reported that Phillips 66 (PSX) has applied for federal and state permits for an export facility 20 miles off Corpus Christi, to be called Bluewater Texas Terminal (Reuters)
    • PSX has not officially announced this project
  • Enterprise Products (EPD) reported to be exploring sale of its 50% stake in Corpus Christi crude export terminal, a JV with Plains All American (PAA) (Reuters)


  • Government of Canada approved Trans Mountain expansion (Bloomberg)
  • Two Minnesota state agencies said they will hold up approval of Enbridge’s (ENB-CA) Line 3 project until problems with its environmental review are resolved, but can continue work on the permits (CBS MN)
  • Ciner Resources (CINR) announced resignation of CEO Kirk Milling, to be succeeded by Oguz Erkan, current Director of International Operations (press release)
  • MLP Parity act returns with a new name: Financing Our Future Energy Act (Senator Coons announcement)