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REAL ESTATE SERVICES

Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Water Water Everywhere

Midstream was positive across the board this week, led by U.S. and Canadian corporations, but MLPs were positive as well.  Midstream traded in-line with utilities, which traded up on lower interest rates and a flight to safety across the market. 

Midstream keeping up with utilities was encouraging in a negative week for the broad equity market, helped by positive macro (lower interest rates and higher commodity prices), follow-through speculation on private equity interest after last Friday’s MLP M&A news, and positive vibes from the annual MLP and Midstream Energy Infrastructure (MEIC) conference in Las Vegas this week.

News this week was all about water.  Williams had a pipeline setback on the basis of a water permit.  Also, there is an IPO on the road with a large water services component, NGL made a big water acquisition, and a big private investment into a private water company.  Water services, while they may not feel like midstream to EPD’s management team, are a growth area within midstream that will continue to gain attention.

Quick Conference Review

The MEIC was hosted at a location off the East Coast for the first time in its history.  The conference originally was in New York City, then it moved up to Connecticut for several years, before making the jump to Jacksonville, then Orlando and now Las Vegas. 

Notable positives about the conference: use of cubicles and 5 minutes in between meetings made logistics easier, jamming most of the meetings into Tuesday made for more free time on other days.  The hotel gym was well-stocked, high quality restaurant options were close by.  Negatives were hotel-oriented: low energy blackjack dealers, 6-5 payout on blackjacks, long Starbucks lines, and super long walks from the elevators.

The mood was generally positive for both investors and management teams.  As for the content of the conference, there was a heavy focus on de-leveraging and capital discipline.  Growth was less of a focus.  Private equity, as both a source of capital and potential competition, was oft-discussed.

There were a number of MLPs with ongoing strategic reviews or overhangs where management teams had no significant updates.  Those include: IDR eliminations that need to happen (PSXP, DCP, SHLX), potential sponsor changes (NBLX, WES), uncertain sponsor plans (TGE, SEMG, USAC), and uncertain project timing (ET, EQM).

What Investors Want

Some management teams at the conference were still polling investors as to their capital allocation preferences: “We’ll accommodate what the market wants on distribution growth” was a quote I wrote down from one meeting. 

How will a management team know what the market wants? Apparently, by polling investors at conferences.  The problem with that is the sample size is small and what investors want may not be what’s best for the business.  Investors also may not even know what they want, or it may change from day-to-day.  What the market really wants in terms of capital allocation is leadership from strong executives with a sense of what their business needs, rather than guessing at a moving target.

It’s like the noted sage Garth Algar said in Wayne’s World: “Let me tell you a little something I’ve learned about women.  They want you to come get them.  They love it.”  An assertive Garth Algar may not be political correct these days.  But an assertive management team, with confidence in what’s right for their business should be rewarded over time (assuming they actually know what’s best for their business).

Winners & Losers

The two biggest winners in the MLP sector each announced acquisitions this week, NGL in water and SHLX with additional interests in pipelines.  Ciner Resources LP (CINR, but listed under its old ticker OCIR in the chart below) announced a 40% distribution cut to help fund growth projects, traded down sharply Monday, and finished down 15.5% on the week.  No other notable news in the bottom 5 this week.

SMLP gave back some of its gains from last week.  CINR (OCIR below), TOO and CAPL all repeated in the bottom 5 this week.  On the YTD leaderboard, CINR and TOO joined the bottom 5, replacing BPMP and WLKP.  On the top 5 YTD, NGL extended its lead, BPL and USAC jumped up a few spots.

Midstream Corporations

SEMG traded up on speculation of activism and private equity interest based on an Alinda (a current owner) filing early in the week.  Then mid-week, SEMG and Keyera announced it was joining SEMG rather than build a competing NGL line in Canada.  TRGP traded well, potentially on speculation of private equity interest after the BPL buyout last week.  AM and ENLC rounded out the top 5.  The bottom 5 included just 3 negative stocks.  LNG seemed to be impacted again by China trade deal reporting after a strong week last week.  WMB’s water permit issue likely drove its underperformance.

SEMG and AM repeated in the top 5.  WMB repeated near the bottom.  On the YTD leaderboard, KMI extended its lead on the group, as Chairman Kinder continues to buy shares.  ENLC jumped two spots to 3rd place.  At the bottom of the group, only ALTM is negative YTD.

Canadian Midstream

Canadian midstream stocks traded very well, benefitting from lower interest rates, positive commentary from Pembina at its analyst day and from Keyera from its earnings call.  With the exception of KML, the entire group was positive.

On the YTD leaderboard, TRP is still in the lead, but Keyera is closing in on it after a strong week.  ENB leapfrogged Pembina in the middle of the back, while KML continues to re-rate lower following KMI’s announcement last week.

News of the (Midstream) World

Capital Markets

  • Rattler Midstream LP (RTLR) launched IPO seeking to sell 33.3mm units at $17.50/unit midpoint pricing for a total of $583mm in gross proceeds (press release)
    • Expected to price next Thursday night (5/23)
    • RTLR owns crude oil gathering, natural gas gathering pipelines and integrated water system on acreage that overlays FANG’s core Midland and Delaware Basin development areas
    • RTLR also has 10% equity interests in each of the Gray Oak and EPIC oil pipeline projects
    • IPO represents 22% of the outstanding shares, implying overall market cap of $2.6bn at midpoint price
    • RTLR plans to pay distribution of $1.00/unit annualized (5.7% IPO yield)
    • Trailing 12 months distributable cash flow of $57.8mm, project 12 months DCF of $175mm, implying 15x forward DCF multiple
    • RTLR is a partnership, but issues a 1099 because it is electing to be a taxpayer for federal income tax purposes
    • RTLR will own and operate midstream and water assets supporting properties and production of Diamondback Energy (FANG)
    • More Nuance: For purposes of this site, RTLR performance will be included in the midstream corporation group and does not count as an MLP IPO, even though it will be eligible for inclusion in the Alerian MLP Index
  • NuStar Energy (NS) priced a $500mm offering of 6.00% senior notes due 2026 at par (press release)

Growth Projects / M&A

  • Shell Midstream (SHLX) announced $800mm drop-down acquisition from Royal Dutch Shell (press release)
    • SHLX will acquire 26.0% equity interest in Explorer Pipeline Company and 10.1% interest in Colonial Pipeline Company
    • SHLX will now have a 38.6% and 16.1% interest in Explorer and Colonial, respectively
    • Acquisition is to be funded with 75% debt and 25% equity placement to Shell Midstream LP Holdings and it is expected to be completed at 7x EBITDA
  • NGL Energy Partners (NGL) announced the combination of its Water Solutions business with Mesquite Disposals Unlimited in an $890mm transaction (press release)
    • NGL will issue $100mm of 9.625% Class C Fixed-to-Floating rate cumulative redeemable perpetual preferred units to owners of Mesquite, who also have an option to receive six million common units at $16/unit at closing
  • Keyera (KEY-CA) announced FID of the Key Access Pipeline System, an NGL and condensate pipeline system that will transport product from Montney and Duvernay to Fort Saskatchewan (press release)
    • Key Access Pipeline is a 50/50 JV between KEY and SemCAMS Midstream, which is owned jointly by SemGroup (SEMG) and KKR
    • Key Access is estimated to cost $1.3bn, or $650mm to KEY, and is expected to be operational in H1 2022

Other

  • Private wastewater firm WaterBridge Resources announced 20% investment by Singapore sovereign wealth fund GIC that values the firm at $2.8bn, according to Wall Street Journal (article)
    • Former PTXP CFO and former Lehman Brothers colleague of mine Steven Jones is CFO of Waterbridge
    • Waterbridge, just 3 years old, is the largest water player in the Permian
  • New York regulators denied a key permit for $1bn Northeast Supply Enhancement (NESE) being developed by Williams Companies (Bloomberg)