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CBRE GLOBAL INVESTORS

CBRE Global Investors, combined with CBRE Clarion Securities and CBRE Caledon, is one of the world’s leading real asset investment managers providing real estate and infrastructure investment solutions to over 500 clients worldwide.

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CBRE Global Investors is the investment management division of CBRE Group, Inc. the world’s premier commercial real estate services and investment firm.  The company’s shares trade on the New York Stock Exchange under the symbol “CBRE.”

REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Somber Market, Midstream Mentality

Midstream was negative this week, along with most other global equities and commodities.  Midstream outperformed broader energy stocks, but underperformed the S&P 500 and utilities, which continue to grind higher.  It was a big week for ex-dividend dates across midstream, which tends to correlate to weaker performance generally for MLPs. 

It was a bummer of a week all around, with the tragic story of Kobe Bryant and 8 others on Sunday hitting dads across the nation especially hard.  The tone remained negative throughout the week, as concerns over the coronavirus led to the first federally-mandated quarantine in the U.S. since the 1960s small pox outbreak.  The Super Bowl Sunday will be a welcome distraction, hopefully it’s not a blowout…

Midstream Earnings

Midstream earnings season is off to a slow start and it will continue for another 3 weeks or so.   3 of the 5 biggest MLPs reported this week (EPD, MMP and MPLX), and each one of them was met with heavy selling for different reasons.

  • MPLX results were good and the current financial profile for MPLX compares favorably with other MLPs (on traditional leverage and coverage metrics). But uncertainty around the future situation with its sponsor and the outlook of its dominant processing footprint in the Marcellus and Utica shale areas.
  • EPD announced a small programmatic buyback and lower 2020 capital expenditures, but management also indicated a willingness to continue to develop assets when there are opportunities, a faux pas in the current midstream climate.
  • MMP, which announced a large buyback program last week, but this week the market was focused on lower year over year guidance. MMP has been very disciplined with its capital, and it has been rewarded with a premium valuation that remains intact despite weakness on the day it reported.  

Larger forces were at play this week, driving funds away from energy and midstream sectors, away from stocks in general.  In the upcoming week, PAA and NS will report results, among a few others.  Energy Transfer doesn’t report until 2/19, WMB and TRGP on 2/20, LNG and OKE not until 2/25.  Hopefully, dark macro sentiment doesn’t hang over the whole earnings season, and hopefully Midstream companies don’t add to the negativity with their own micro challenges.    

Status Update: January

The first month of 2020 is in the books, and for MLPs it was the first negative January since 2016.  That year finished very positive and was actually the last year midstream (AMNA +34%) and MLPs (AMZ +18%) outperformed the S&P 500. 

January historically has been a strong month for MLPs.  This -5.6% January return is only the third time in 25 years that AMZ has been more than 1.5% negative (2015 and 2016 were the other two).  The AMZ held up much better than broader energy stocks, which were hit even harder by commodity price free fall of late.  The XOP Oil & Gas E&P ETF declined 19% in January.

The -5.6% return in January makes it 4 of the last 6 months where the AMZ has produced greater than 5% negative return, for an overall -13.8% total return since the end of July.  With two months left in the quarter, there is still plenty of time for the AMZ to avoid a third straight negative quarter. 

February has historically been mixed for MLPs and midstream stocks, with 14 positive and 10 negative years.  2018 was the worst ever February at -9.5% and there has never been a February that produced greater than 5% gains.

AMNA Status Update

The AMNA index was also down in January, by less than MLPs, helped by better U.S. and Canadian corporation performance.  Those two components have helped AMNA hold up much better through the multi-year grossing down of energy exposure. 

Winners & Losers

MLPs

For a second week in a row the top 5 performers among MLPs were exclusively stocks that are not in any of Alerian’s MLP Indexes that get tracked by ETF products.  The bottom 5 names didn’t include many MLP Index names either.   Two shipping MLPs (GLOP and GMLP) made the bottom 5, ARLP’s distribution cut and earnings release was not well received.  Large minerals player BSM sold off on weaker commodity prices. 

ARLP, EQM and GLOP repeated in the bottom 5 this week.  EVA and SRLP repeated as top performers.  On the YTD leaderboard, coal MLP CCR holds the overall lead, with CAPL as the next closest.  Among midstream MLPs, liquids-focused MLPs with refinery origins (HEP, NS and PBFX) lead the way.  The bottom 5 includes 4 MLPs already down 20%+. 

Midstream Corporations

Not many bright spots among the midstream corporation group this week.  HESM continues to trade well after removing its IDRs and checking the box to be a corporation for tax purposes.  OKE and KMI held up better than others, while those exposed to northeast natural gas basins and challenged producers (AM, ETRN, WMB) were the worst performers.

ALTM stopped dropping this week after 20%+ decline last week.  OKE and TGE repeated in the top 5.  AM and ETRN were both down double digits again this week, both have given back most of their December gains.  On the YTD leaderboard, HESM retains the top spot, TGE by default is second as its cash takeout bid means it should stay close to where it is until the deal closes.  KMI and LNG are both negative for the year but are still in the top 5.  Each of the bottom 5 is down 15%+ (including distributions) already in 2020.

Canadian Midstream

Canadian midstream returns this week were characteristically in a tight range and better than U.S. midstream stocks in a declining market.  The biggest names performed the best, smaller names underperformed others.

This week’s lineup of performers was nearly identical to last week’s lineup.  On the YTD leaderboard, IPL and GEI are the worst performers, Pembina is still in the lead, but the top 3 are tightly bunched.

News of the (Midstream) World

Very light news week, although there were 3 distribution announcements and another IDR elimination transaction.  There are only 14 midstream MLPs remaining with a structure that includes IDRs, with SHLX, DKL and SUN the only 3 sending more than 20% of total distributions to the IDR owners.

Capital Markets

  • EPD announced in its earnings release it will use 2% of its 2020 CFO to buy back common units this year (press release)

Growth Projects / M&A

  • CNX Midstream (CNXM) announced IDR elimination transaction (filing)
    • CNXM to issue 26mm new common units, 3 new Class B units, and a cash payment of $135 paid in 3 annual installments

Other

  • Enterprise Products Partners (EPD) announced the election of CEO Jim Teague and CFO Randall Fowler to roles of co-CEO (press release)
    • Fowler will continue his role as CFO

Dividend / Distribution

  • 15 distribution announcements this week, including 3 cuts
  • OMP continues to grow 20% annualized despite nearly 13% yield