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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

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Week Thoughts: Simple Green, Midstream Red

Midstream sold off along with most things this week, but as a whole did slightly better than the broad stock market, outperforming for a second straight week.  MLPs were the best performing group in midstream, benefitting from their renewed obscurity more than a flight to safety.  Just like when the S&P 500 is going up, the market seems pre-occupied with itself, rather than paying much attention to midstream and certainly not MLPs.

The MLP Index had its worst week since the end of August, closed at its lowest level since July 20, and is down 7% from its recent high of August 9, closing just above the 200-day moving average.  Oil dropped 4%, oil in Canada was in the low $20s/bbl and ethane was hammered on Gulf Coast cracker maintenance.  But things aren’t as bleak as stock action feels.  Company-specific catalysts are just around the corner: 3Q earnings season kicks off with Kinder Morgan this Wednesday.  Results should reinforce positive fundamentals and commitment to improved financial discipline.

The big company-specific news this week was Antero’s simplification announcement, which was well received even after the long wait.  It was a win-win-win for all 3 stocks involved, at least it was on Tuesday.  After seeing both AMGP and AM rally, and after seeing how well ETP and TEP traded on the day of their announcements, if I were contemplating simplification, I’d be in a hurry to get it finalized and announced.

Winners & Losers

AM was by far the best performer this week on the simplification news.  A few other MLPs traded up, all smaller MLPs, including two with extensive crude-by-rail operations (PBFX and USDP).  No news or trends that I noticed among the bottom 5.  NS was the worst performer this week on no news.

NGL went from worst last week to the top 5 this week.  On the YTD leaderboard, every one of the top 5 from last week sold off this week, but CQP took the biggest tumble dropping from 2nd place last week to 5th this week.  SHLX joined the bottom 5, displacing EQM.

General Partners and Midstream Corporations

There weren’t as many positive stocks in the G.P. and midstream corporation group, just two in fact.  AMGP didn’t have quite the same pop as the MLP it will be absorbing, but it did trade up 9% on Tuesday and did have a positive week overall.  A few unresolved GP holding companies remain, and two of them (ENLC and EQGP) were at the bottom of the group.  Analyst downgrades and initiations seemed to impact outsized weakness for OKE and SEMG this week.

WGP made it two weeks in a row near the top, same with AMGP.  On the YTD leaderboard, AMGP climbed a few spots among the bottom 5.  Order of the top 5 stayed the same, and each one traded down.

Canadian Midstream

Monday was Canadian Thanksgiving and the market was closed, but the Canadian midstream group caught up and underperformed U.S. midstream and MLPs by the end of the week, and each stock in the group was negative, within a tight range outside of Keyera, which slightly outperformed.  Western Canadian crude prices were crushed this week, down into the low $20/bbl, a more than $50/bbl spread to the U.S. benchmark.  That blowout, due to refinery outages and maintenance, seemed to weigh on this group.  TRP was the worst performer, perhaps impacted by uncertainty on some of its U.S. pipelines due to the 501g forms that were filed this week.

ENB gave back most of its gains from last week.  Keyera went from worst to first.  On the YTD leaderboard, TRP took over the bottom spot, and Pembina dropped back into negative territory.

News of the (Midstream) World

Light news week overall, but it was nice to get another long-awaited simplification deal announced in the Antero deal.  We did get a bonus zombie MLP when NAP announced a buyout offer.  Also, distribution announcement season is off to a slow start.

Capital Markets

  • No news.

Growth Projects / M&A

  • Antero Midstream GP (AMGP) announced acquisition of all outstanding Antero Midstream Partners (AM) common units in a stock and cash transaction (press release)
    • AMGP will convert into a full corporation for governance purposes and the new entity (“New AM”) will be renamed Antero Midstream Corp (AM)
    • AMGP will acquire all 188.1mm common units of AM, including the 98.9mm units owned by Antero Resources (AR)
    • AR shareholders will receive a combination of $3.00 in cash and 1.6023 shares of New AM stock for each AM unit owned, resulting in a $30.43 value per AM unit based on the prior day closing price, a 3% premium
    • AM unitholders can choose to receive their merger consideration in all cash, all stock, or a combination of $3.415 in cash and 1.635 shares of New AM, resulting in a $31.41 value per AM unit based on prior day closing price, a 6.5% premium
    • Series B holders agreed to terminate and exchange their units for an aggregate of 17.35mm shares in New AM
    • The transaction eliminates AM’s IDRs
    • Transaction is expected to close in 1Q19
  • Williams Companies (WMB) announced Transco pipeline received 15-year binding commitments with Seneca Resources and Cabot Oil & Gas for 580mm dth/d of firm natural gas pipeline capacity on the proposed Leidy South expansion (press release)
  • Navios Maritime Acquisition (NNA) announced the acquisition of Navios Maritime Midstream Partners (NAP) in a stock-for-stock transaction (press release)
    • NAP holders can exchange each of their units for either 6.292 newly issued NNA share or 1 share of a newly issued series of convertible participating preferred stock of NNA
      • Each share of preferred stock will be convertible by its holder into 5.1 shares of NNA common stock at any time beginning six months after closing of the transaction.
    • NNA also announced a 1-for-15 reverse stock split of its issued and outstanding shares of common stock subject to shareholder approval
    • Another zombie MLP until this small deal closes
  • Green Plains Partners (GPP) announced the sale of storage and transportation assets and railcar leases to Green Plains Inc. (GPRE) (press release)
    • GPP will receive 8.9mm of its own units currently owned by GPRE for a value of $120.9mm
  • Ferrellgas Partners (FGP) announced acquisitions of Salathe Propane and North Star Exchange, each a third-party distributor for FGP’s Blue Rhine barbeque tank exchange division (press release)

Distribution Announcements

Genesis Energy was the only distribution announcement I saw this week, which brings the total to 3 so far this quarter.  GEL’s increase of nearly 2.0% makes 8% in a year, but is still 25% lower than its 2Q 2017 distribution.