Midstream stocks traded up amid a strong backdrop for energy stocks and for income stocks. Oil prices spiked, then settled down, finishing up more than 5% on the week. Interest rates dropped 18 bps on the week, pushing utilities to new heights and providing a tailwind for midstream stocks. The MLP Index (AMZ) was positive in back-to-back weeks for the first time since July 12. The broader midstream index (AMNA) was positive for a 4th straight week.
It was a good week to be long energy stocks, and probably a tough week to be short energy stocks (especially if one of those was Semgroup). Monday’s oil price spike on the Saudi Arabia outage was the biggest single day % gain in decades. While the rally was short lived, uncertainty remains on timing and ability to bring its facility back to full operating capacity, and uncertainty remains on whether the attack will lead to further military action.
Beyond oil prices, there was some big news in midstream on Monday. We got a true third party corporate M&A transaction when Energy Transfer announced its acquisition of Semgroup at a massive premium (65%).
Despite all those tailwinds, midstream stocks saw a muted response on Monday, with some of the smaller names moving 5-10% higher, but larger names trading with less enthusiasm. Alerian MLP Index Equal Weight (which mitigates the impact of ET down 4%) was only up 2%, and the broader midstream index was up less than 1%.
Midstream Universe to Lose Another Ticker
The SEMG deal may seem like a one-off, but it actually follows a 2019 M&A trend. The takeout of BPL, the bid for TGE and the purchase of SEMG were all done at large premiums to the stock price at the time, but each transaction resulted in a takeout multiple of around 11-11.5x EBITDA, which is roughly where most U.S. midstream companies trade today (aside from outliers like OKE or MMP that trade better).
The negative takeaway from the M&A trend, therefore, is that these big splashy premiums don’t argue for a full sector re-rate to some higher multiple. Asset sales have been done at higher multiples, but corporate M&A is getting done at market multiples. This may provide comfort on the downside, but it isn’t too compelling on the upside.
But there is an actionable takeaway: the next corporate M&A situation is likely to be a midstream company with (1) beaten down stock price and (2) a strategic asset that would be valuable on its own. There aren’t many such midstream companies left, but there are some. Don’t ask me for specific recommendations. Happy hunting!
It was nice to get a positive overreaction in energy stocks for a change, even if it was short lived.
A loyal reader pointed out that while the kids have come up a few times in weekly posts, my wife hasn’t. Despite not talking about the wife here, I remain happily married, 15 years this November actually. It feels like timing is right to work in an anecdote involving her and relate it to the energy market this week.
My wife has a strong maternal instinct. The beginning of the school year the instinct is on high alert. She is ready to pounce on any real or perceived slight by anyone associated with school, from kids at the bus stop to the principal of the school. This heightened level of awareness eventually cools off. In fact, by the end of the school year, fatigue levels are much higher and her capacity to give a care about small things is much less.
Now, I would never use the word “overreaction” to describe anything my wife does, but something like an overreaction is not foreign to my household, especially in the early weeks of the school year. I think this week alone, I had a 15 minute discussion with her about a kid at the bus stop talking trash to one of our kids, and another half hour chat about a teacher shutting down another of our kids in front of the class for some reason or another, I don’t really remember…
Anyway, I thought it an applicable metaphor for this week’s overreaction in the oil market and simultaneous under-reaction in midstream. The under-reaction is likely reflective of fatigue in the midstream space such that any single positive event is not enough to garner much enthusiasm, but the low grade enthusiasm is helping midstream grind higher.
Winners & Losers
ET was the biggest MLP to make the bottom 5 this week, dragged down by its Monday M&A announcement of SEMG. USDP led all MLPs in performance. USDP is very small, but it does provide direct exposure to crude by rail coming out of Canada, which was the likely driver of investor interest this week.
EQM repeated in the top 5 and HEP repeated in the bottom 5 this week. BPMP went from bottom 5 to top 5. On the YTD leaderboard, CEQP made its return to the top 5 after a 4% return this week. CEQP is now up 20% since August 15th.
SEMG led the group of midstream corporations this week on the big news Monday that ET will be acquiring it. LNG had news and outperformed, but the entire group traded pretty well this week with 1.9% median return.
SEMG repeated in the top 5 in a big way this week. ALTM and ETRN repeated as well. In the bottom 5, PAGP, WMB and TGE repeated. On the YTD leaderboard, SEMG went from among the biggest losers to among the biggest winners YTD. TRGP’s recent performance has helped its YTD total return break above 20% again.
TRP led the Canadian midstream corporations this week, but ENB was also near the top again. IPL was the worst performer in a week of U.S. midstream M&A, which is an indication the market is losing interest in the potential for IPL to be taken out, despite a confirmed approach over the summer.
IPL and GEI underperformed again this week. On the YTD leaderboard, ENB made some more progress in catching up to the rest of the group after some marginally positive news on Line 3 this week. On the YTD leaderboard, TRP and ENB crept towards 50% return and 20% return, respectively.
News of the (Midstream) World
Growth Projects / M&A