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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Un-Navigable Midstream

Midstream and MLP stock performance accelerated to the downside this week, finishing with bigger losses this week than last week.  It was also the 4th consecutive negative week for midstream, the longest such streak since late December.  

Earnings season ended, with overall strength among the largest U.S. midstream stocks.  In Canada, earnings season was almost universally better than expectations, which when combined with M&A news this week has helped the AMNA index hold up much better than the U.S. midstream indexes that don’t include Canada.

The market has turned against midstream and MLPs in a big way of late:

  • The MLP Index total return slipped back to single digits this week after being up 17% at the end of June
    • AMZ has declined 10.7% since peaking on 7/12 (8.9% including distributions)
    • Since peaking on 7/11, AMNA has declined 8.2% (7.2% including distributions)
    • Since 7/11, S&P 500 has declined 2.7% and oil prices have dropped 9.9%
  • MLPs now trail broader midstream (AMNA Index) by 850 basis points
  • Worst week for MLPs since December 21st of last year
  • First time AMZ Index has been down more than 3% on consecutive weeks since February 2018

Like someone with deteriorating health who is described as having “good days and bad days”, MLPs have good weeks and bad weeks, but lately its been more bad weeks than good ones.  This week was somehow worse than last week, despite more stable stock market and commodity price environment, strong results from MLPs representing 40% of the index (PAA and ET this week, MMP and EPD last week), ever lower interest rates, and no big value destructive transactions. 

The malaise in the broader energy sector continues, this week hitting oilfield services hardest. The malaise is nothing new, but this week shows the respect level for MLPs among energy stocks appears to be somewhere between E&P stocks and oilfield services stocks.  So, when oilfield services stocks blow up, MLPs get impacted dragged into that morass, rather than benefiting from a flight to yield-oriented equities like utilities and other infrastructure stocks due to dropping interest rates.

Without a Paddle

This weekend, I had the pleasure of taking a kayak trip down a 5 mile stretch of the Guadalupe River out in the Texas Hill Country.  The terrain along the way morphed from wide, deep and serene water to mild rapids.  There were also a few points where the river thinned out to the point where it was just a trickle through a small dam or rocks.  In those shallow areas, we had to get out and carry/slide our vessels to more navigable water.

If you haven’t experienced a river excursion like this, you may have trouble visualizing what I’m talking about.  But perhaps you’ve seen the classic Peanuts animated feature film from 1977, “Race for Your Life, Charlie Brown!”, wherein Charlie Brown and his friends partake in a river race while on vacation at Camp Remote.

Sentiment is so weak in energy right now, being a midstream investor feels a bit like when the kayak bottom scrapes and beaches itself in shallow water.  Long gone are the days when midstream investors could float along on ever increasing fund flows and tailwinds from ready access to capital.  Also gone is the brief spiking recovery from earlier this year. 

Things have ground to a halt once again.  Long-term midstream investors must get out and carry their kayaks to the next point of navigable waters.  I’m not sure what changes the current situation, some of it may be seasonal, some of it cyclical and certainly some of it feels structural.  None of it feels good.

Winners & Losers

There were a few MLPs that traded up this week, although only a little.  Energy Transfer’s great quarterly results helped it trade up 0.6% this week.  Because its 10% of the AMZ, if ET wasn’t the ballast it was this week, the AMZ’s -4.3% would have been significantly worse.  Outside of ET, NBLX traded up 0.2%, supported by rumors of a potential bidder for NBL’s midstream business.

The bottom 5 were all down 10%+ this week, and the worst two performers were down 20%+ this week.  ENBL’s strong quarter, distribution increase and sponsor’s indication of support (i.e. not selling stock) could not save it from dropping 11% this week.  I guess if they had missed expectations it would have sold off even more.

NBLX and NRP went from bottom 5 to top 5 week over week, MMLP went from top 5 to bottom 5, with all MLPs bouncing around with day to day changes in sentiment.  On the YTD leaderboard, NS picked up a few spots and landed in 3rd place as others have fallen by the wayside.  TGP replaced USAC in the top 5. 

Midstream Corporations

AM declined double digit percentages for the 3rd straight week.  OKE was near the top again this week, but it was KMI’s turn to be the only stock in the group that was positive.  ENLC dropped nearly 15% after a bad quarter, a CEO retread and a bad conference call.

On the YTD leaderboard, KMI and OKE continue to hold up and still have 30%+ returns, and no other stock in the group is up 15%.  PAGP’s strong results did not translate into positive stock performance this week.  Each of the bottom 5 has produced negative 20% total returns YTD. 

Canadian Midstream

Some M&A fireworks this week in Canada, where Inter Pipeline confirmed receipt of a takeout bid and announced potential asset sales in Europe to reduce leverage.   Outside of IPL, the rest of the group’s performance was in a tight range around 0%.  In general, though, much less volatility in Canada.  Boring continues to work for Canadian midstream.

GEI bounced back from last place a week ago to finish near the top of the group.  ENB repeated among the better performers.  On the YTD leaderboard, TRP gave up its top spot, slipping to third behind smaller Canadian-centric names IPL and KEY. 

News of the (Midstream) World

Capital Markets

  • Magellan Midstream (MMP) priced public offering of $500mm of 3.950% senior notes due 2050 at 99.910% of par (press release)

Growth Projects / M&A

  • NGL Energy Partners (NGL) announced the sale of TransMontaigne Product Services to a strategic buyer for $300mm (press release)
    • Sale includes TPSL Terminaling Services Agreement including exclusive rights to utilize 18 terminals, line space along Colonia and Plantation Pipelines, two wholly-owned refined product terminals in Georgia, and all customer contracts associated with the assets
  • DCP Midstream (DCP) announced the expansion of Southern Hills capacity from 190 MBbls/d to 230 MBbls/d by Q4 2020 (press release)
  • Inter Pipeline (IPL-CA) confirmed that it received an unsolicited proposal to be acquired but that it is not in negotiations with any third party after an unsubstantiated report from the Globe & Mail said that a bidder approached IPL with a $30/share takeover offer (press release)
    • IPL confirmed it is exploring the sale of its European bulk liquid storage business, which was also mentioned in the Globe & Mail article, in a separate release (press release)
  • IPL-CA announced a new $100mm oil pipeline project between its Bow River and Central Alberta pipeline systems (press release)
    • The new pipeline, Viking Connector, will begin construction immediately and is expected to be completed in H1 2020 with volume of 10,000-15,000 bpd


  • EnLink Midstream (ENLC) announced CEO Mike Garberding leaving to pursue other opportunities, replaced immediately by former CEO Barry Davis (press release)
    • Garberding was fired
  • Summit Midstream Partners (SMLP) appointed Heath Deneke President and CEO, effective September 16 (press release)
    • Interim CEO, Leonard Mallet, will continue to serve as SMLP’s COO
    • Deneke most recently served as EVP and COO at Crestwood Equity Partners (CEQP)
  • Western Gas (WES) announced management changes, including new CEO and CFO, both current employees of Occidental (OXY), which acquired WES general partner (press release)
    • WES CFO Jaime Casas remains in his current role

Distribution Announcements

  • ENBL announced its first distribution increase since 2015, raising it 3.9%
  • SNMP suspended distributions, stock sold off 70% on Thursday