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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Scarcity Value Rally in MLPs

Midstream stocks outpaced the S&P 500 and utilities this week in the face of falling oil prices and rising interest rates.  MLPs were the best performers within midstream, benefitting from the “value rally” and also from Friday’s MLP index re-balance announcement that essentially spreads around the same amount of capital across an increasingly scarce group of MLPs.  Canadian midstream stocks lagged and held back the broader midstream index. 

The Alerian MLP Index is up 6.2% over 12 trading days since bottoming on August 27, 2019.  It was the best week for the MLP Index since mid-February this year, and the third best week of the year overall.  The broader midstream index (AMNA) is up 5.5% since that same day.  Its gains this week were less substantial than the AMZ, but AMNA has had more of those strong weeks so far this year.  This was the 9th biggest week for AMNA this year and its biggest weekly gain since 2 weeks ago.

Midstream Relief, Headwinds Ignored

While things feel a little better in midstream this week, there were some news items that added to unease around the outlook for energy stocks generally, although the news out of Saudi Arabia this weekend may have rendered it all moot in the short term.

  • EQT announced layoffs of 196 out of roughly 800 employees (Observer-Reporter)
  • 2017 vintage SPAC Alta Mesa (AMR) filed for bankruptcy (Marketwatch
  • Greenpeace demonstrated against oil exporrts at the Houston Ship Channel by hanging from a bridge
  • 2020 demand outlook was slightly lowered by OPEC while supply growth from outside OPEC is expected to leave world markets oversupplied
  • In geopolitics, John Bolton left his position within the White House, which had oil market implications due to hawkish stance on Iran
  • My Little Pony (MLP) was announced as a finalist for the Toy Hall of Fame (see announcement here)

But for this week, those larger energy concerns took a back seat to optimism in value found within the midstream space.  No major company-specific news proved to be good news for the group.

Winners & Losers

Beaten-down producer sponsored names outperformed again this week, this time it was NBLX and EQM at the top.  SHLX ripped 6% Friday on the index re-balance news.  Alerian announced removal of BPL, which is more than 6.5% weight in both the AMZ and AMZI indexes.

The BPL news was expected, but the removal of HEP from the AMZI (tracked by massive ETF AMLP) caught the market off guard and it was one of the weakest performers among MLPs Friday and the worst for the week overall.

NGL and EQM went from bottom 5 last week to top 5 this week.  Gains this week put NGL back on top of the YTD leaderboard, and vaulted TGP into second place.  EQM climbed one spot in the bottom 5 to third from the bottom.

Midstream Corporations

It wasn’t just MLPs that rallied, the broader market rally in value stocks seemed to help smaller midstream corporations, too.  Median midstream corporation performance of 5.6% was well above index returns.

Smaller names dominated the top 5 performers, while YTD leaders like OKE and KMI were among the worst performers.  TGE rallied through the bid price of $19.50, closing above $20/unit, on anticipation of a better offer to come.

ALTM repeated at the top of the group.  ETRN, AM, ENLC, and SEMG went from bottom 5 last week to top 5 this week.  On the YTD leaderboard, OKE remains the best performing midstream corporation, but TRGP jumped over WMB and PAGP into third place.  Each of the top 5 is above 15% total return YTD.  No changes to the bottom 5.

Canadian Midstream

Canadian midstream as a group underperformed MLPs and U.S. midstream stocks, but Enbridge continued its relative strength, leading the group with a nearly 2% gain, about 450 basis points ahead of TRP for the week, but has a long way to go to catch up.  IPL sold off, recent reporting of M&A interest unable to hold the market’s interest.

TRP was the worst performer in Canada for a second straight week but retains its spot atop the YTD leaderboard.

In Memoriam: Pickens MLP Legacy

Legendary oil man, corporate activist investor, renewable energy pioneer, and major OSU donor T. Boone Pickens died at 91 years old this week.  Without much sector news this week, I spent some time researching Pickens and the mark he left on energy sector during the first upstream MLP boom in the mid-1980s.

Pickens aggressively used the MLP structure in the 1980s to launch bids for several much larger companies.  His famous 1985 bid for Unocal ended in a Delaware Supreme Court ruling that would apparently shape corporate securities takeover defense law.  

After Unocal defended itself from the Mesa bid, it did end up spinning off an upstream MLP of its own (as was proposed by Pickens in his bid.  That MLP was Union Exploration Partners (NYSE: UXP), which was eventually converted into a corporation in 1990 (read about UXP origins here).

Pickens was extremely active in the 1980s, seeking to create value through M&A rather than development activities.  After the failed Unocal bid in 1985, Pickens announced the conversion of his company Mesa Petroleum into a partnership, Mesa Limited Partnership (NYSE: MLP), which you can read about here.

Pickens would use “MLP” to launch bids for many companies, back when takeover activity backed by junk bonds was rampant, well documented in the book Predator’s Ball.  If some of these bids had worked out differently, the midstream landscape would look much different today.  A rough timeline of his notable bids and deals includes:

  • 1969: Mesa acquired Hugoton Production Company
  • 1982: Mesa Petroleum Corp bid for Cities Service Company of Tulsa, and made $30mm when white knight Gulf Oil won (although the Gulf deal would fall through as well)
    • Cities Service Company is better known by its downstream brand Citgo
  • 1983: Mesa Petroleum Corp. bid for General American Oil, but was outbid by Phillips Petroleum
  • 1983: Mesa Petroleum Corp. made bid for KN Energy, a pipeline and utility company
  • 1984: Built large stake in Gulf Oil, was offered a greenmail payment that he rejected and Mesa was reported to make over $750mm when Gulf Oil was eventually bought by Socal Oil
  • 1986: KN Energy rejected a second bid from Mesa Petroleum Corp.
    • KN Energy would acquire Kinder Morgan in a 1999 reverse merger and would be the vehicle upon which Richard Kinder would amass his fortune
  • 1986: Diamond Shamrock rejected $2bn bid from Mesa Petroleum Corp.
    • Diamond Shamrock would eventually spawn MLP Shamrock Logistics, which became Valero LP and then today’s NuStar Energy (NS)
  • 1986: Mesa Limited Partnership (MLP) acquired Pioneer Corporation for $800mm (NY Times
  • 1987: Pickens went after companies outside the oil industry, including Singer, Boeing and Newmont Mining
  • 1988: as part of a sale of $7.3bn of oil and gas assets to several companies, Tenneco agreed to sell mid-continent assets to Mesa Limited Partnershp (MLP) for $715mm
  • 1991: MLP converted back to corporation 
  • 1997: Mesa Petroleum Corp. eventually merged with Parker & Parsley Petroleum Company to form what is today Pioneer Natural Resources (PXD), one of the biggest independent Permian operators today

For even more on Pickens, see this 1987 C-Span interview with Pickens where he discusses at length his problems with corporate America when it comes to corporate management mis-alignment, and also takes calls on oil geopolitics and other deals of the day.

News of the (Midstream) World

The rate grab continues, after $3.4bn of debt issuance last week, another $4.5bn in debt issuance this week across midstream.  Refinancing or issuing fresh debt at rates this low should be a boon relative to expectations as recently as mid-July.  Also, micro-MLP Blueknight that saw its takeout bid withdrawn and Alerian’s index re-balance release seemed to move the market Friday, as noted above.

Capital Markets

  • Cheniere Energy Partners (CQP) priced upsized offering of $1.5bn of 4.500% senior notes due 2029 at par (press release)
    • Offering was originally $1bn
  • Plains All American (PAA) priced offering of $1.0bn of 3.550% senior notes due 2029 at 99.801% of par (filing)
  • Pembina (PPL-CA) closed offering of $1.5bn of senior unsecured notes which was completed in three tranches (press release)
    • $600mm of 2.56% notes due 2023
    • $600mm of 3.31% notes due 2030
    • $300mm of 4.54% notes due 2049
  • Gibson Energy (GEI-CA) announced offering of $500mm of 3.60% senior unsecured notes due 2029 (press release)

Growth Projects / M&A

  • Blueknight Energy (BKEP) holder Ergon withdrew its non-binding proposal to acquire all remaining BKEP common units not already owned (filing)
    • Ergon submitted its acquisition proposal on August 5 for $1.35 per common unit and $5.67 per Series A preferred unit
    • Ergon was unable to reach an agreement with the Conflicts Committee resulting in the withdrawal
    • BKEP was originally called Semgroup Energy (SGLP) and went public in July 2007 at $22/unit


    • Alerian announced the results of its September 2019 Index Review (press release), with the following changes to be implemented as of the close of business on 9/20/19:
      • AMNA, AMUS, AMEI: Buckeye Partners (BPL) will be removed
      • AMZ: BPL and Sanchez Midstream (SNMP) will be removed
      • AMZI: BPL and Holly Energy Partners (HEP) will be removed