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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Uptrend is Midstream's Friend

Midstream rode higher commodity prices and a record-setting broad equity market to another positive week.  The steady grind higher for midstream continues.  This was the 6th straight positive week for the MLP Index, which is up up 5.7% over those 6 weeks (WTI oil price is up 13.1% over that same time).

Positive streaks of more than six weeks for the AMZ are rare: this is just the 14th such streak in the last 20 years and the second in the last 5 years.  The last such streak was in August of last year.  The AMZ traded down 4% in the six weeks that followed into late September.

Tropical Storm Barry helped boost commodity prices with 1 mbpd of reported production shut-ins.  NGL prices may have bottomed in thin trading pre-July 4th, both ethane and propane are up bigly off the bottom.  That NGL price rally seems to have helped the biggest integrated NGL players outperform this week, including EPD, TRGP, and ET.  EPD notably broke through a hard resistance level of $30/unit and is just one of many encouraging charts across the sector (hat tip to @adambscott1979 for posting the chart below).

Despite the 20-27% return for midstream this year, the sector has underperformed broad equities on a trailing 1 year basis.  The six straight positive weeks and the very recent positive turn in NGL prices, investors appear to be gaining confidence in midstream heading into 2Q results, which will need to be accompanied by some positive commentary on the back half of the year to help the market look through weaker 2Q NGL margins and calls for increased producer discipline.

Quiet Games

This week each year is notoriously the slowest for the sports media industrial complex, especially the day after the MLB All Star Game, before the second half of the baseball season begins and there is almost nothing going on (aside from early Wimbledon rounds).  While it was a pretty boring week of actual events, NBA free agent drama offered a major trade (Russell Westbrook for Chris Paul) that should marginally increase playoff hopes of Rockets fans.

Source: Houston Post

Astrodome interior, 1965. Source: Houston Post.

Its usually a pretty quiet time for midstream stocks as well.  But just like above, by the end of the week encouraging commodity price and stock price action appears to have led to marginally improved sentiment.  There remains a healthy amount of nervousness given volatility in the sector in recent years, but if this quarter shows continued strong execution across midstream sector, value in midstream stocks will be hard to ignore.

Winners & Losers

As noted above, NGL price strength this week seemed to impact a few stocks more than others.  One of those was EPD, which also announced high return liquids-related export projects early in the week and closed above $30/unit on Wednesday for the first time in 4 years.   GEL was also a notable outperformer on no news, but it seems to have some momentum of late, perhaps finally seeing some fundamental tailwinds in some of its business lines.

On the downside, EQM underperformed, perhaps on news that the Rice Brothers would be taking over management of EQT.  The implication could be more disciplined capital deployment impacting volumes, or potential for shares of ETRN to be under pressure from potential EQT selling or even potential to renegotiate gathering rates.

TOO and DKL went from first last week to worst this week.  EQM repeated in the bottom 5.  On the YTD leaderboard, USAC broke through to join NGL in the 50%+ total return club.  OMP dropped out of the top 5, replaced by TGP after divergent performance this week.

Midstream Corporations

U.S. midstream corporations outperformed MLPs this week, and the best performers were some of the smaller names in this group.  TRGP led the group on stronger NGL prices.  TGE was up 2.7% again this week.  AM was not a beneficiary of higher NGL prices this week, giving up half of last week’s gains.

TRGP, TGE and SEMG repeated near the top of the group, while ENLC and AM went the other way.  ETRN repeated near the bottom.  On the YTD leaderboard, TRGP joined the 20%+ return club at the top of the group, but well off the torrid pace set by KMI.

Canadian Midstream

Canada traded well this week, with every name positive except KML.  Keyera continues to trade well and led all Canadians.

Keyera’s big week put it into first place on the YTD leaderboard, replacing the TRP juggernaut.  ENB is lagging, but is still up 21% in USD terms, which is well ahead of the MLP Index.

News of the (Midstream) World

Not much news in the midstream universe this week.  Tellurian had a big week, trading up 9% overall on the customer contract announcement.  If TELL achieves FID for Driftwood, I may start including them in the charts above.  Beyond that news, EPD announced several projects small projects with high return expectations, PAA launched an open season to squeeze a bit more egress out of Canada, and distribution announcement season kicked off.

Capital Markets

  • Brookfield Infrastructure Partners (BIP) announced two equity transactions that raised $750mm (press release)
    • Bought deal of 11.8mm units at $42.50/unit, raising $500mm in gross proceeds at 3.3% discount to prior closing price
    • Private placement of an additional 6.2mm redeemable partnership units to affiliated Brookfield companies for an additional $250mm
    • BIP is a diverse partnership that issues a K-1 and owns global infrastructure assets, including some midstream assets
    • This equity deal is not indicative of the equity capital markets available to traditional U.S. MLPs, but this was a large deal at a smallish discount that traded well in the aftermarket

Growth Projects / M&A

  • Enterprise Products (EPD) announced three expansion projects at its Houston Ship Channel Terminal including (press release):
    • Increasing LPG loading capacity by 260,000 bpd raising total capacity to 1,100,000 bpd by Q3 2020
    • Adding refrigeration facilities that will allow EPD to load an incremental 67,200 bpd of polymer grade propylene by Q4 2020
    • Building an eighth dock at the terminal with the capability to load 840,000 bpd of crude oil, increasing export capacity to 2.75mm bpd by Q4 2020
  • Plains All American (PAA) announced binding open season on its Western Corridor Pipeline System (press release)
  • Tellurian (TELL) entered into agreements with subsidiaries of Total S.A. (FP-FR) for TELL to sell 1 Mtpa of LNG from Driftwood LNG terminal and for Total to invest $500mm in Driftwood (press release)
    • Condition for Total’s investment is that TELL invests $1bn on same terms as Total, which TELL is in discussions with private equity players to raise that $1bn in preferred at a subsidiary (not at Tellurian, Inc. level)
    • FID of phase I by end of 2019 if TELL can convert its other customers and finalize their participation

Distribution Announcements

  • TGE and AM still growing despite recent market skepticism on their stock prices and 9%+ yields each
    • TGE still has the highest 3-year distribution CAGR of any midstream company at 30%, ahead of KMI at 26%