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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Stocks Up on Guidance

Midstream rallied for a 6th straight week, but this week was different than the prior 5.  This week’s rally was led by larger, more integrated players in the U.S. and Canada, not by gathering & processing MLPs.  This week was less about bottom fishing or short covering.  Broad equity market strength and a 25% oil price gain helped.

Stocks Versus The COVID-19

A few years before “Sleepless in Seattle” and nearly a decade before “You’ve Got Mail”, Tom Hanks and Meg Ryan starred opposite each other in one of my favorite films of all time: Joe Versus the Volcano (1990).  After 600+ posts, I’m actually not sure if I’ve talked about the film here before.  It’s sort of quirky, dark comedy that features great vintage Tom Hanks personality. 

Incredibly, the film was released on March 9, 1990, exactly 30 years before the worst day in energy stock history. You remember, the day AMZ dropped 27.4% and AMNA dropped 22.2%.  

I thought about this movie for a few reasons this week.  First, staying at home for these last few months has been challenging in a mind-numbing sort of way that reminded me of the drudgery of Joe’s workplace at the start of the film.  I love my job, but I can relate to the opening scenes of the film as I combat the combination of WFH, parenting and teaching school, especially with the barrage of earnings and data points this week.  The days just blend together.

The basic plot points are Joe gets diagnosed with a rare uncurable terminal disease called a “Brain Cloud”, then he gets propositioned to jump into a volcano to appease the native population of an island by a rich man seeking to exploit said island for rare minerals.  After a stunning lack of due diligence, Joe agrees to do it, eventually making it to the island after nearly dying of thirst and deliriously dancing on a raft made of giant luggage. 

“Nobody knows anything. We’ll take this leap, and we’ll see.  We’ll jump, and we’ll see.  That’s Life.”

Joe leaps into the volcano (with Meg Ryan’s character), and (spoiler alert) the volcano spits them out.  Also, the terminal illness was a lie.  Joe and his new girlfriend are granted a chance to start fresh, although the film ends with them floating in the middle of the ocean.

This brings me to the second reason I thought of the film this week.  Midstream stocks, MLPs in particular, appear to be getting spit out by the Volcano, given yet another chance at life after being left for dead at the end of March.  MLPs are up 89% since then, and lowered guidance was more than priced in based on earnings reactions. 

Distribution ex-dates this week slowed MLPs down a bit, and gains from here depend heavily on the existence and pace of an economic recovery, but the market is no longer pricing in a terminal illness for the group, which is good.

Winners & Losers

MLPs

The MLP performances were all about reactions to earnings this week.  The market reacted positively to CEQP’s earnings and it gained 30% to lead all MLPs.  CEQP closed the week +219% from its 3/30 low, +237% counting the latest distribution.  Likewise, earnings were a positive catalyst for USAC, BSM, GEL and NS.  It felt like the market was relieved that results, outlook and commentary weren’t worse. The market didn’t react positively to earnings released by SRLP, SHLX, ARLP and WES.  Uncertainty loomed large over the future of a few of those worst performers.

GEL repeated in the top 5 week-over-week.  BSM and USAC went from bottom 5 last week to top 5 this week.  PBFX went from top 5 to bottom 5.  On the YTD leaderboard, the top 5 are all down less than 20% and the bottom 5 are all down more than 60%.  TCP dropped out of the top 5, replaced by SUN.  WES joined the bottom 5, replacing CEQP.

Midstream Corporations

TRGP led all midstream corporations this week, rallying on reduced guidance and commentary on earnings that was not as bad as feared.  RTLR was also up double digits.  The big three corps OKE, KMI and WMB rounded out the top 5.  The downside was mostly single producer focused gathering & processing companies (AM, ENLC, ALTM, ETRN), and LNG.

TRGP and RTLR repeated in the top 5, while ENLC went from first to almost worst week over week. AM’s streak of several weeks near the top of the group ended.  On the YTD leaderboard, KMI climbed into the second spot behind WMB, and ETRN climbs into 5th place at -37%.  Things have improved in the bottom 5, where only one stock is down 70%+. 

Canadian Midstream

Canadian midstream outperformed the U.S. this week after several weeks of MLPs trying to catch up.  Gibson and ENB results were very well-received, as management teams highlighted stability and resilience of their businesses even with large expected shut-ins.  TRP was the worst performer, likely the result of rotation into some of the other names.

GEI went from worst last week to first this week.  TRP repeated near the bottom of the group.  The YTD leaderboard is tightening up, with ENB continuing to gain on TRP and GEI down just 25%.  IPL continues to lag.

News of the (Midstream) World

Midstream had a debt issuance bonanza this week, with more than $4bn of issuance this week.  While all issuers were investment grade, it was notable to see OKE’s pricing so wide of its prior issuance just a few months ago.  Beyond that, SMLP had another restructuring, IPL raised its cost estimate for its large petchem project under development, and AM executive took millions in chips off the table.

Capital Markets

  • Oneok (OKE) priced $1.5bn worth of senior notes (press release), including:
    • $600mm of 5.85% senior notes due 2025
    • $600mm of 6.35% senior notes due 2030
    • $300mm of 7.15% senior notes due 2050
    • Pricing for this issue was much lower (higher yield) than the 3.10% senior notes due 2030 issued in March
  • Cheniere Energy Partners (CQP) priced $2.0bn of 4.5% senior notes due 2030 at 99.744% of par, to yield 4.532% (press release)
  • Magellan Midstream (MMP) priced $500mm of 3.25% senior notes due 2030 at 99.88% of par, to yield 3.264% (press release)
  • Williams (WMB) subsidiary Transcontinental Gas Pipe Line priced $700mm of 3.25% senior notes due 2030 at 99.787% of par to yield 3.275%, $500mm of senior notes due 2050 at 99.424% of par, to yield 3.983% (press release)
  • Antero Midstream Corporation (AM) executives sell 28mm shares in block trade for $114.8mm (filing)
    • CEO Paul Rady sold 18mm shares at $4.10/share for $73.8mm
    • President Glen Warren sold 10mm shares at $4.10/share for $41.0mm 

Growth Projects / M&A

  • Summit Midstream (SMLP) announced a series of transactions that effectively remove the private equity control and reduce future obligations that had weighed on SMLP (press release)
    • SMLP will acquire its own non-economic GP interest from Energy Capital Partners (ECP) for $35mm in cash and 10mm warrants
    • SMLP will borrow $35mm from ECP in a first-lien senior secured credit agreement with 8% interest that expires on 3/31/21
    • The purchase of the GP includes the 51.2mm units owned by ECP ($63mm value prior to announcement), the deferred purchase price obligation (DPPO) receivable, and a $158.2mm liability in the form of a term loan
    • SMLP also reduced capex plans for 2020 by 33% to $40mm and expects to be closer to the low end of EBITDA guidance for 2020
  • Inter Pipeline (IPL-CA) announced refreshed expectations for cost and timing of its Heartland Petrochemical Complex (press release)
    • Cost estimate now $4.0bn vs. $3.5bn previously, due to timing changes and impact of COVID-19 on construction
    • In-service expectation of late 2021 may instead be early 2022
    • As one of the few midstream companies engaged in developing a project of this scale during the COVID-19 outbreak, the cost escalation is a concern and future large projects may face similar cost estimate increases if the way construction is done must change
  • More midstream companies and MLPs reduced capital expenditure plans this week, including CEQP, NBLX, TRGP, ENLC, ENB, DCP
  • Williams (WMB) announced agreement with Chevron and Total to provide offshore natural gas transportation services to the Anchor development in the deepwater Gulf of Mexico (press release)

Distributions

  • One more MLP distribution cut this week: in addition to their transactions announced this week, SMLP also announced distribution suspension