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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Midstream Week Thoughts: Selling Goes Viral

Midstream joined in on the biggest and broadest equity selloff in recent memory this week.  This was the worst week for the S&P 500 and for MLPs since 2008.  Oil dropped to the mid-$40s, interest rates and natural gas prices dropped to fresh lows. 

There wasn’t much to be done as an investor, other than pick your spots to reduce risk early in the week and then maybe start to add to core holdings at much lower prices later in the week.  It was the end to a brutal earnings season and brutal month for energy stocks. 

Expectations have been re-based, risk factors are well-known, and there was incremental progress on cleaning up IDR structures and superfluous entities (EQM).  We inch ever-further from midstream as an asset class and ever-closer to a sector comprised of a few large midstream players with high barriers to entry and high bargaining power. 

Selloff in Context

One of the things I do here is put midstream price action into context of history.  This week was notable, this month was notable, but we’ve seen worse, for the most part.  For MLPs, it was the third worst week of all time (there were two 20% decline weeks in fall 2008).  Midstream and MLP investors could at last take some comfort that it wasn’t just energy this time.  For the AMNA, it was the worst week in that index’s shorter history (that dates back to late 2013).

Decarbonization Whitepaper

Before the market volatility took the spotlight this week, ESG was a dominant talking point this year.  Activism around climate change continues to ramp up in recent years.  De-carbonization remains a priority of global governments, reflecting a high level of interest among constituents. 

This week, we published a whitepaper arguing that while new technology (e.g. Tesla, Bloom Energy) get headlines for potential to reduce carbon emissions long-term, infrastructure companies across all four major sectors (utilities, transportation, communication and midstream) are able to make a significant immediate impact on carbon emissions.  Click here to read the piece.

Status Update

The month mercifully ended today and MLPs registered a -14% return (including distributions) in February.  Without the late rally today, it could have contended for the worst ever month in MLP history.  As it stands, it was the 4th worst month ever, and worst since September 2015 when MLPs were down 15%.  MLPs rallied 10% in October 2015 after that collapse in September.

Only one other time has the MLP Index started with two straight negative months: 2016.  That was the last year MLPs outperformed the S&P 500.  March was positive that year and was the turning point for the group. 

Switching to the broader midstream sector, February was tied for the second worst month for the AMNA in its brief history as an index.  The quarter is also off to a rough start with two straight negative months.  AMNA’s outperformance relative to MLPs in recent years has only grown wider with this year’s returns, helped by steadier performance out of Canada and large U.S. corporations.

Winners & Losers

MLPs

There was a positive MLP this week, and it was GLP, which spiked into the close Friday to finish up 8.6% for the day and just above 3% for the week.  That small positive note aside, the sector was hammered across the board.  Each of the top 5 is not a member of the major MLP Indexes.  The bottom 5 were all down 20%+ this week, with GEL dropping the most for a second straight week after disappointing investors last week.

In addition to GEL, CEQP repeated in the bottom 5.  Only 1 existing MLP remains positive for the year: EVA.  All but 1 of the bottom 5 YTD are down more than 40% YTD in two short months.

Midstream Corporations

Among midstream corporations, not a single one was positive and the median return in the group was worse than the performance of the MLP and midstream indexes.  Cheniere rallied hard Friday and seemed to benefit somehow from the demise of early stage LNG export development company Tellurian (TELL), which declined 72% this week, including more than 50% on Friday alone, after prospects of an agreement with Petronet seemed to fade.

ETRN took another stab at simplification this week that was accompanied by resetting of agreements with EQT that did not please the market.  Other high beta midstream names (PAGP, TRGP, ALTM) were some other big losers.

ALTM and PAGP repeated in the bottom 5 this week.  AM repeated in the top 5.  HESM and Cheniere went from bottom 5 to top 5. 

On the YTD leaderboard, no positive names after KMI and OKE dropped sharply this week.  Median return in the group is -20% YTD, including dividends, but market cap weighted returns are a bit better.  As bad as AM has been this year to date, it has outperformed several G&P MLPs.

Canadian Midstream

Canadian midstream was down, but in typical Canadian fashion, the spread within the group was tight.  Keyera, Gibson and Pembina reported results, no big divergences from expectations among them.  TRP held up the best.

TRP led the group for a second straight week, and ENB was near the bottom for a second straight week.  On the YTD leaderboard, last week all but IPL were positive, but this week the entire group is now negative.

News of the (Midstream) World

ETRN simplified a little more, SHLX finally announced its IDR elimination deal, EPD settled with M&B in units and not cash, many insiders bought shares, and rumors circulated about a huge asset sale.  A pretty big week of news, but none of it much matter relative to the broad market selloff.   After SHLX, only a few MLPs with IDRs remain, certainly very few that matter.  

Capital Markets

  • Westlake Chemical (WLKP) filed S-3 to register up to $500mm worth of common units (filing)
  • EPD disclosed that 54.8mm shares owned by M&B converted to common stock with EPD not redeeming any for cash (filing)

Growth Projects / M&A

  • Reuters reported that Williams (WMB) is seeking to sell partial stakes in assets with their Western segment (Reuters)
  • Equitrans Midstream (ETRN) announced transformative actions, including acquisition of EQM and conversion to C-Corp (press release)
    • Each outstanding public common unit of EQM will be exchanged for 2.44 shares of ETRN stock, representing a 3% premium based on 20-day VWAP
    • ETRN and EQT entered into agreements for ETRN to purchase and retire 25.3mm shares of ETRN stock from EQT by paying $52mm up front and by reducing $235mm of gathering fees in the two years following MVP’s in-service
    • EQM and EQT executed a gas gathering agreement that includes an increase in MVC, the addition of over 100,000 undeveloped WV acres, a contract extension, enhanced capex protections, and gathering fee relief
  • Shell Midstream (SHLX) and Royal Dutch Shell agreed to eliminate IDRs and a dropdown of assets to SHLX (press release)
    • SHLX will acquire Shell’s 79% interest in Mattox Pipeline and certain logistics assets at the Shell Norco Manufacturing Complex
    • Shell will receive 160mm newly issued SHLX common units, plus $1.2bn of Series A perpetual convertible preferred units at a price of $23.63 per unit a consideration for the asset sales and IDR elimination
  • ONEOK (OKE) announced project expansions of Elk Creek Pipeline to 400,000 bpd, a fully contracted 100,000 bpd additional expansion of the West Texas LPG pipeline, and an additional 200 MMcf/d expansion of the Demicks Lake natural gas procession facility in Williston Basin (press release)

Other

  • Insider buys from executives of KMI, ET, PAA, GEL and WMB this week
  • Delek Logistics (DKL) announced that Assi Ginzburg, EVP and CFO, will not renew his contract to pursue other opportunities (press release)
    • Assi will remain in his role until May while Delek is in the process of identifying a replacement