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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Santa Rally Melts

Midstream underperformed the market for a third straight week after its massive bounce in November and early December.  The group is clinging to a positive month of performance with just 4 more trading days left, but midstream is way off the pace of the S&P 500, utilities and infrastructure this week, this year and the last 6 years.

Lower oil and natural gas prices were a headwind to midstream trading in a light week of relevant sector news.  Re-positioning for a post-vaccine return of demand appears to have already occurred well in advance of these final weeks of 2020. 

Even with a strong rebound this quarter, MLPs trail broader midstream stocks by around 500 basis point in 2020.  That would make it 5 years of AMNA beating AMZ in annual total return out of the last 6.  Put another way, if you invested $10,000 at the end of 2014:

  • In AMNA, you’d have $7,952, assuming you reinvested the dividends.
  • In AMZ, you’d have $5,058.

Reflecting on another lost year for MLPs, it becomes harder to picture a scenario of sustained MLP outperformance relative to the AMNA.  Broader midstream (AMNA) has corporations that are easier for institutions and foreign investors to own.  AMNA also has much more exposure to companies with natural gas pipeline assets, while AMZ has very little gas pipeline exposure.

Happy Holidays! Try to enjoy the downtime, even if energy stocks aren’t keeping up with the market.

Winners & Losers

MLPs

A few MLPs were positive this week, the minimum amount to qualify for use of the word “few”.  PAA led all MLPs with a 1% gain on no news, while another company with oil pipeline and storage assets (NS) was one of the biggest losers, also on no news. 

PAA repeated in the top 5 week-over-week.  On the YTD leaderboard, with just 4 trading days left, most MLPs are very ready for the 2021 leaderboard reset. 

Midstream Corporations

Smaller names AM and ALTM led all midstream corporations this week, while big cap names like OKE, KMI and WMB were all underperformers. 

AM enters the final few trading days of the year with a massive lead on the rest of the sector, up nearly 40% including distributions.  On the other end, PAGP seems to have locked down the bottom of the group for 2020.  The way this sector goes, 2021 is likely to offer a similar disparity of returns between top and bottom performers, but probably with two different stocks at either end of the barbell.

Canadian Midstream

All of Canada was down this week, and again ENB held up better than others as it continues to gain support after Line 3 permitting and construction progress in recent months.  Pembina still struggling to attract interest, finishing near the bottom of the group again this week.

On the YTD leaderboard, ENB is on track for the come from behind 2020 performance victory in Canada, overtaking GEI and TRP in the second half of the year on rebounding oil prices and Line 3 progress.  But regulatory risk still looms to some extent with the Biden Administration taking over.

 

News of the (Midstream) World

Very light on news this week, and I’d expect even less in the next week.  Enjoy the downtime.

Capital Markets

  • None.

Growth Projects / M&A

  • Blueknight Energy (BKEP) announced sale of crude business in multiple transactions for $162mm (press release)
    • ENB was the buyer of some of the assets ($132mm for 6.6mm barrels of storage at Cushing)
  • Martin Midstream (MMLP) announced sale of Mega lubricants assets to John W. Stone Oil Distributor, LLC for $22.4mm (press release)

Other

  • NGL Energy (NGL) and its Grand Mesa Pipeline subsidiary announced settlement with customer Extraction Oil & Gas and new supply agreement (press release)