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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Market Staycation Supports Midstream

Stocks, especially utilities, roared back in a holiday-shortened week, helped by additional stimulus measures and signs of hope from daily COVID-19 statistics.  Midstream stocks (and to a lesser degree MLPs) came along for the ride.  The midstream performance hierarchy returned to trend this week with AMNA outpacing AMZ. 

A potential OPEC+ agreement with or without participation from the U.S. was the hope that seemed to propel energy stocks this week.  But the deal remained uncertain by the time the market closed Thursday and oil prices were down sharply on the week. 

Midstream stocks basically kept pace with the broad equity market, so maybe the move this week was less about oil prices and more about stocks generally.  Midstream, like the rest of the market, continued to benefit from a rebound in interest after an awful March.

The only notable piece of midstream news was PAA’s distribution cut this week.  Expect the remaining uncertain MLP distribution announcements to come in the next week, including CEQP, NS, WES and NGL.  The week after that is the beginning of earnings season.  

Staycation from Our Problems

Like many of you, I have settled into the new work-from-home-plus-home-school reality.  Schoolwork keeps the kids busy enough during the day mot of the time.  But this week was Spring Break, which left a considerable gap in terms of keeping everyone from going too stir crazy. 

Things we’ve done in the last few weeks for entertainment that I would recommend:

  • Build a pillow fort
  • Play chess, poker, Rummikub, board games
  • Play Legos, have build competitions
  • Draw, coloring books
  • Re-arrange furniture
  • Clean out drawers, closets, basements
  • Learn a new skill (sewing facemasks, cooking, knitting, musical instrument)
  • Write something (story, blog post, book, journal entry)
  • Yard work
  • Exercise, push-up challenges

We try to be good parents and limit “electronics time” to a few hours every weekend day.  In this shutdown, we’ve extended that time to every weekday as well.  But this week, after exhausting the above list and after enduring a week of no school assignments and staring down the barrel of a weekend of bad weather, we decided to go even further.  We decided to open the floodgates and allow an entire day of video games, similar to concept of the film “The Purge”.  Anything goes for video games for an entire day.  We are taking a break from our break.

Midstream took a break this week too.  There was no meaningful news and stocks were higher across the market.  Further Fed stimulus played the role of “electronics time” for the market, which helped sentiment for energy stocks too.  We’ll get back to worrying about how much demand destruction will happen, how much liquids storage is left and how much production will shut-in next week.    

Winners & Losers

MLPs

WES rallied 75% in four days this week and still yields around 50%! Other smaller high yield, high beta MLPs rallied hard as well.  There were some negative MLPs this week, including two refinery-sponsored names PSXP and HEP.  Closer to the wellhead stocks traded best this week in risk-on action, despite the collapse in oil prices week over week.

I went through this week and removed the following below $250mm market cap. names from the performance charts: SMLP, GLOP, GMLP, OMP, HMLP, CCR, NRP, CINR and USDP.   There are only 35 MLPs in the universe with more than $250mm in market cap at this point.

EQM went from leader last week to bottom 5 this week.  NGL went from bottom 5 last week to top 5 this week, as volatility whips stocks around from.  The math gets really hard after such a dramatic fall.  For example, NBLX rallied 41% this week and is still down more than 80% year-to-date.  WES’s 76% rally this week helped it climb out of the bottom spot, but it remains down 70% YTD, including distributions.

Midstream Corporations

Closer the wellhead and higher beta was a winning combination in the midstream corporation group as well this week, with TRGP and OKE way out in front of the pack.  That combo didn’t work as well for ENLC, which was negative.  PAGP also underperformed after its distribution cut. 

LNG and TRGP bounced into the top 5 after landing in the bottom 5 last week.  ETRN, HESM and AM went from top 5 to bottom 5 week over week.  On the YTD leaderboard, no change in the top 5, although LNG and WMB are catching up to KMI.  OKE climbed out of the bottom 5, replaced by PAGP. 

Canadian Midstream

Same story in Canada, underperforming, high beta names rallied.  IPL and Keyera were both up 20%.  Enbridge was the only name not to finish up double digits this week. 

Inter Pipeline went from worst last week to first this week.  Keyera repeated near the top of the group, while ENB repeated near the bottom of the group.  On the YTD leaderboard, TRP’s propensity to trade up in good times and not down as much in bad times has it well ahead of any midstream stock in the universe in USD terms.  ENB is in second place, but well behind after this week’s divergence.

News of the (Midstream) World

It was a very light news week.  PAA’s 50% cut was basically it for news.  Things were so light, I put two credit facility increases in the news.  Expect further distribution announcements in the next week, with CEQP, WES and NS most notable on the hot seat names.  No big M&A…yet.

Capital Markets

  • Enterprise Products (EPD) entered new credit facility that adds an incremental $1.0bn in borrowing capacity to its current $5.0bn capacity (filing)
  • Pembina Pipeline (PPL-CA) entered new $800mm credit facility with existing lenders (press release)
    • Expands overall credit facility capacity to $3.3bn

Growth Projects / M&A

  • None

Other

  • PAA announced 50% distribution cut, third cut in four years, cut comes one year after 20% dividend increase
  • KNOP maintained its distribution