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:
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.
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.
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
Growth Projects / M&A