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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

Week Thoughts: Solid Earnings, Shaky Stocks

It was a week of fits and starts for MLPs and midstream.  It seemed like no one wanted to be caught holding MLPs at month-end, which seemed to hurt price action Tuesday after a positive start to the week.  Then oil prices tumbled Thursday and brought midstream stocks down with them.  Strong employment report Friday sparked a rally in U.S. stocks basically across the board.  Midstream bounced clawed back some of its losses to finish the week overall down between 1% and 1.5%, depending on the index. 

Next week’s final round of 1Q results include: PAA, ET, BPL, TGE, LNG, MPLX/ANDX, TRGP, DCP, USAC, SMLP, DKL, BSM.  We are unlikely to see any movement on the remaining IDR holdouts reporting this week (DCP, DKL), based on how we got no movement on the ones who reported this week (PSXP, SHLX, NBLX, CNXM).

E-P-Demoralizing

Aside from a few outliers (e.g. ENLC), earnings didn’t seem to be a needle-mover for the sector as a whole this week. EPD had another big quarter, traded up on the day but didn’t break $30/unit, which seems to happen each quarter.  EPD hasn’t closed above $30/unit since 7/15/2015, nearly 4 years ago. 

EPD is a best-in-class MLP with great integrated assets, the ability to compete against new potential entrants (like OKE with LPG exports) with lower rates.  But EPD is also a proxy for MLP-focused fund vehicles, which as we’ve discussed at length (see here and here), will suffer from shrinking of the MLP-specific universe that doesn’t have the trading liquidity to support those funds, much less allow the to be active.  Additionally, EPD is used as an easy short to balance against long midstream exposure (or so I’ve heard…from EPD).

EPD’s stagnant stock price is probably why EPD gets the question routinely on whether they’d consider converting.  EPD doesn’t need to, but if EPD were a corporation, it would trade better.  And that matters to some of us.

Capital Discipline vs. Strategic Growth

Two themes have developed in recent years that are at odds with each other: capital discipline on the one hand, strategic investments that will integrate assets on the other.

OKE acknowledged this week they would be willing to stretch on returns to get an LPG export facility developed based on its strategic potential, i.e. the network effect up the value chain.  It seems like there is at least one midstream company with an existing LPG export facility that is small enough for OKE to buy (TRGP).  So, why build their own?  It may be for the same reason TRGP built their own NGL pipeline, to control barrels througout the value chain on their own system.

These themes are worth monitoring, because while some midstream companies and MLPs are de-leveraging rapidly and seeking capital efficient growth, others are seeing leverage creep higher as they work through large backlogs of strategic investments.

Status Update: April Showers

April was the first negative month of 2019 both for MLPs (AMZ) and for midstream (AMNA) after positive returns in each of the first 3 months of the year.   April has been a seasonally strong month historically, and this was just the 4th time in 24 years of data that April was negative for MLPs. 

Profit taking in light of strong performance to open the year makes some sense, but as noted last week, extending the period further back suggests much of the rally in 2019 has been a reversal of extreme downside pressure in 4Q.

May’s historical record is much more mixed over the years.  Last year was +5.1%, but the average return in May has been negative, including in 12 of the 23 years, a higher number than any other month except November.

Midstream Index Update Through April

AMNA returns were ahead of MLP returns in April, but only slightly.  YTD Midstream returns through April remain above 20%, led by strong performance among some of the largest names in the universe (TRP, KMI, WMB, OKE).

May’s historical record is much more mixed over the years.  Last year was +5.1%, but the average return in May has been negative, including in 12 of the 23 years, a higher number than any other month except November.

Midstream Index Update Through April

AMNA returns were ahead of MLP returns in April, but only slightly.  YTD Midstream returns through April remain above 20%, led by strong performance among some of the largest names in the universe (TRP, KMI, WMB, OKE).

Winners & Losers

There was wide dispersion across winners and losers in the MLP group this week.  Winners were mostly small and off the beaten path names like SRLP, GMLP and DKL.  ANDX traded well, and will report earning next week that could (but probably won’t) include an update to the situation with its sister MLP MPLX. 

On the negative end, NBLX was down 11%, as the market continue to sell following NBL’s disclosure of a strategic review of its midstream holdings.  WES similarly has been sold with ongoing sponsor uncertainty.  SMLP weakness continues ahead of its earnings call late next week, likely on read-throughs from producers who reported this week.  Notable move in ET on Friday.  It traded up 3% on strong volume.

SRLP and GLOP repeated in the top 5, while NBLX and SMLP repeated in the bottom 5 this week.  On the YTD leaderboard, SRLP broke into the top 5 and sits just below SRLP and NGL for best total return so far in 2019.  In the bottom 5, SMLP joined MMLP as the only two MLPs with double digit negative returns YTD.

Midstream Corporations

ALTM bounced back this week, with much of the gains coming Friday after the market digested results Thursday.  Only 3 others in the midstream corporation group were positive on the week.  ENLC’s reduction in forward guidance for Oklahoma volumes while maintaining full year company-wide EBITDA guidance did not pass muster with the market this week, sending it down 5%.  AM, WMB and OKE were not far behind, despite generally solid 1Q results and outlook. TRGP, PAGP and LNG have traded better than average the last two weeks, and all three report earnings next week.

KMI did not trade up this week but retains its lead on the rest of the group with 30% total return this year.  No change to the top 5 names, but only PAGP was positive for the week.  No change to the bottom 5 names either.

Canadian Midstream

Canadian midstream underperformed MLPs and U.S. midstream corporations this week.  Outside of KML, Enbridge outperformed TC Energy (TransCanada’s previously announced name change to TC Energy was approved by shareholders Friday) and Pembina Pipeline this week, despite strong results for both TRP and PPL on Friday. 

TRP remains well ahead of the pace in Canada, but notably ENB has narrowed the gap, with earnings next week as the next potential catalyst.

News of the (Midstream) World

Slow news week outside of earnings.  Several pending open seasons, but no material updates on any of them. Still no word on the Kinder Morgan Canada resolution.

Capital Markets

  • None.

Growth Projects / M&A

  • Teekay Corp (TK) announced sale of remaining G.P. and L.P. interests in Teekay Offshore (TOO) to Brookfield Business Partners for $100mm in cash (press release)
  • Capline Pipeline Company announced one-week extension to Capline reversal binding open season (press release)
    • Capline is owned by MPC, PAA and BP
  • PDC Energy (PDCE) announced sale of gas and water midstream assets in the Delaware Basin for $310mm (press release)
  • AltaGas (ALA-CA) announced sale of its 30% interest in Stonewall Gas Gathering to DTE for $275mm (press release)
    • DTE now owns 85% of Stonewall, with AM holding the remaining 15%
    • Some readthrough to the recently reported potential sale of Columbia Midstream by TRP, given the systems are basically adjacent to each other
  • Pembina Pipeline (PPL-CA) announced $65mm Duvernay sour treating facility to service Chevron (CVX) under a 20-year commitment and to accommodate third party volumes (press release)
  • Tellurian (TELL) announced a binding open season for Haynesville Global Access Pipeline and Delhi Connector Pipeline (press release)

Dividend / Distribution Announcements

  • 8 more distributions announced this week, with just a few others still to come from the likes of BPL, BPMP, and OMP
  • Notable change to historical policy this week: GEL decided to stop growing its distribution this quarter. On their earnings call this week, management suggested it would be held at this level for the foreseeable future. GEL had raised its distribution for 5 consecutive quarters after cutting it 31% back in 2017.