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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Sector Shrinks, Prices Grow

Big M&A-fueled gains on Friday for MLPs salvaged an otherwise poor weak for midstream stock action.  Midstream stocks were negative most of the week in-line with the broad stock market, both fluctuating around ongoing China trade war “news”.  Positive earnings weren’t enough to generate enthusiasm, but an all-cash buyout of an MLP sure was. 

Friday’s 3.9% gain for the MLP Index was good enough for the second best single day move of the year (1/4 was better at 4.9%).  MLPs posted the best returns in midstream this week, but are still well off the torrid pace of the broader midstream index (AMNA), whch closed the week with YTD return of 22% vs. the AMZ at 17.7%.

Midstream Seeking Road Less Travelled

I live a block from the Villanova campus in the Philadelphia suburbs.  Despite being spoiled with an office less than 10 minutes from my house, this time of year is generally when my frustration with local traffic peaks.  This year has been worse than usual, because the recent National Championships have helped finance major campus construction that adds to the typical congestion.

But graduation is just a week away.  After that, traffic will cease to exist, and my path to work each morning will be a breeze.  This seasonal ebb and flow is similar to the potential path for midstream from here.

At least a few headwinds have cleared in the last few weeks.  The long anticipated merger of MPLX-ANDX (and the 27% backdoor distribution cut) has been announced.  Earnings had been a source of fear after weakness in NGL prices, global LNG prices, reduced activity in Oklahoma.  Earnings turned out to be fine, mostly better than expectations (which had been lowered, but still).  Finally, for those questioning the sustainability of private investor interest in midstream as an alternative source of equity, we got real cash M&A of a midstream company of scale on Friday.  Maybe there doesn’t have to be so much traffic on the path towards midstream stock price gains.

Thoughts on BPL: Another Shrimp on the Barbie

Two more MLPs announced their exit from the universe this week: ANDX and BPL.  The shrinking universe makes any MLP-only index laughably concentrated at the top at this point.  That scarcity value may eventually lead to price appreciation for those left behind, and sometime in the distant future that might lead to a new crop of MLPs.  For now, we probably need to shrink a bit more.

It could have been said about high-growth drop-down MLPs (like ANDX) at one time: “These aren’t your grandfather’s MLPs.” Well, Buckeye Partners (BPL) was your grandfather’s MLP.  It is the oldest MLP still trading, with a 1986 IPO date.  With BPL eliminated (later this year), there are no more 1980s MLPs and not many 1990s MLPs left (OKS, EEP, ETP, APU have already exited).  The next 5 oldest MLPs take us all from 1994 to 1999: FGP, SPH, GEL, EPD, PAA.

BPL was also an old-school MLP focused on growth through external acquisitions, funding those as-needed with just-in-time external capital.  The last few years has been a rough transition for BPL, which eventually sold assets and cut its distribution.

BPL’s buyout by an Australian infrastructure investor was facilitated by its pretty unique structure: no major shareholder among management or the GP and no big existing parent or financial sponsor to contend with.  There are few others with similar situations (MMP, GEL and TRGP come to mind).

In the two articles listed below, I am quoted with further thoughts on the BPL transaction: 

In summary, the deal is positive for midstream as a whole, but is another blow to the MLP structure, which loses its 5th largest remaining MLP.  As noted in numerous posts on this website, the shrinking sector has implications for the fund / product complex complex that had been built around MLPs.

Outstanding questions to discuss in the hallways and at the tables of the MEIC Conference in Las Vegas next week:

  • Who is next?
  • How many more private equity infrastructure players are out there without a U.S. midstream platform?
  • Does this mean the death of the Alerian MLP Index?
  • Does this make EPD more likely to convert to a corporation?

E-P-Debrief: Follow-Up

Speaking of EPD, last week’s post included a stock price chart for EPD, higlighting how long it has been since EPD traded above $30/unit.  I thought I’d follow up and show how well EPD has done relative to the rest of the sector despite trading below $30/unit, see the chart below.  

Unlike the other behemoth MLP (Energy Transfer), EPD trades at a premium valuation multiple relative to other MLPs.  Also, as shown above, EPD has consistently outperformed the Alerian MLP Index over the years, which is amazing in itself, but more so because for the entirely of the years listed below, EPD was the largest weight in that index.

Winners & Losers

There was a theme among winners this week: rallying through lukewarm earnings reports due to M&A.  BPL led all MLPs with a 25% gain this week, more than 100% of which came on Friday.  NS’s asset sale and readthrough from the BPL sale helped it trade up, while ANDX’s long-awaited merger announcement offered relief after its price had been talked down over the last year or so.  Smaller, non-traditional midstream MLPs populated the bottom 5 performers this week.

ANDX repeated in the top 5 this week.  SMLP went from bottom 5 to top 5 this week, SRLP and GMLP went the other way.  The YTD leaderboard was shaken up again this week.  BPL joins APU as zombie MLPs with pending buyouts among the top 5.  NS replaced SRLP in the top 5, and each of the top 5 is up 40%+.  Not much changed in the bottom 5.

Midstream Corporations

The midstream corporation group underperformed MLPs on average this week.  With huge surges on Friday, AM, LNG and SEMG led the way for the group.  LNG hit a low of $60.01 early Thursday, and rebounded mid-earnings call and again Friday to close the week at $67.87, good for a 13% swing.  TGE underperformed notable on Thursday, which seemed related to ET’s discussion of expansion possibilities for the Bakken Pipeline.

PAGP made it two straight weeks towards the top, after reporting blowout results, but gave back some of it Wednesday gains later in the week.  ENLC finished the week as the worst performer in the group for a second straight week.  Not much changed on the YTD leaderboard.

Canadian Midstream

Not much movement in most of the Canadian Midstream group, except for two stocks: IPL and KML.  IPL reported disappointing earnings mid-day and sold off.  KML reported disappointing lack of M&A after-market on Thursday and sold off sharply Friday.

IPL was near the bottom for a second straight week.  KML went from first to worst.  On the YTD leaderboard, KML and IPL weakness have separated those two from the others in the group, which have each produced more than 20% returns this year.

News of the (Midstream) World

Active news week, highlighted by mergers (ANDX), asset sales (NS), company sales (BPL) and lack of sale (KML).  Hard to see how next week will top this week’s excitement, but with the sector convening in Las Vegas next week, anything’s possible.

Capital Markets

  • Altus Midstream (ALTM) announced the issuance of preferred equity via private placement which will be redeemable at any time by ALTM based on delivering the greater of an 11.5% IRR and 1.3x multiple of invested capital (press release)
  • DCP Midstream (DCP) priced $600mm of 5.125% senior notes due 2029 at par (press release)
    • Upsized from $500mm originally offered

Growth Projects / M&A

  • Buckeye Partners (BPL) announced agreement to sell all outstanding units of BPL for $41.50/unit to Australian-based IFM Investors (press release)
    • Price represents a 27.5% premium to prior day closing price and an equity value of $6.5bn
    • Transaction is expected to close in Q4 2019
    • IFM is a fund management firm created by a consortium of Australian pension funds
    • IFM has $90bn of AUM, including $39bn in infrastructure
    • IFM was one of the buyers (alongside Vitol) of the VTTI assets from BPL in a transaction announced in November
  • MPLX (MPLX) announced acquisition of Andeavor Logistics (ANDX) in unit-for-unit transaction (press release)
    • ANDX unitholders will receive 1.135x MPLX units for each ANDX unit held, representing a 7.3% premium, and Marathon Petroleum (MPC) will receive 1.0328 MPLX units for each ANDX unit held, representing a 2.4% discount, blends together for slight premium overall
    • Immediately modestly accretive to MPLX DCF/unit
    • MPC entered into support agreement for the transaction with its 64% L.P. interest in ANDX
    • Backdoor cut for ANDX unitholders of approximately 26%
    • Expected to close in second half of 2019
  • NuStar Energy (NS) announced the sale of its Caribbean terminal, St. Eustatius, to Prostar Capital for $250mm (press release)
  • MPLX announced participation in Wink to Webster Pipeline at a 15% level (press release)
  • Enbridge (ENB-CA) announced new investments totaling $500mm (press release)
    • $200mm expansion of the Dawn to Parkway gas transmission system in Ontario expected to be in service by the end of 2021
    • $200mm investment in ENB’s share of the East-West Tie Transmission Project expected to be in service last 2021
    • $100mm investment in ENB’s share of the Generation Pipeline transaction


  • Kinder Morgan Canada (KML-CA) concluded its multi-month strategic review process and determined to remain a stand-alone public entity (press release)
  • Oregon environmental regulators denied water quality certification the Jordan Cove LNG project (Nasdaq)
    • Jordan Cove LNG is being developed by Pembina Pipeline (PPL)