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June 2, 2018

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Week Thoughts: Differentiated Performance

Midstream and MLPs synched up this week to rally 2.7%, outperforming the S&P 500 and utilities, despite renewed oil price angst this week.  Midstream stocks and MLPs resumed their recovery after last week’s pause, and have now posted gains in 7 of the last 10 weeks.  After bottoming in late March, the AMZ and AMEI have posted total returns of 16.2% and 12.3%, respectively.  The rally has helped the MLP Index break back into positive territory year-to-date, and the MLP Index closed the week almost exactly at its 200 day moving average (269.7).

The Wall Street Journal and other national publications have picked up on infrastructure constraints in the Permian basin that have blown out basis differentials for Permian oil and for U.S. oil prices vs. global oil prices ($10/bbl, near multi-year high).  That press likely helped MLPs trade well this week despite falling oil prices.  When it comes to signing up for a new pipeline, producers (like my kids) sometimes need a stick rather than a carrot to get them motivated, and motivation is needed to keep returns on pipeline development high.
Wider differentials demonstrate a clear need for more pipelines and put more pressure on producers to commit volumes to new pipelines.  These issues are timely and will be a key focal point for those attending the annual analyst day for Plains All American (PAA) this week in Houston.
Status Update: May Flowers
MLPs finished May up 5.1%, on the heels of an 8.1% April (the best month in 2 years).  Follow through was helped by strong results, oil prices and general improvement in energy sentiment.  This month’s gains were good enough for the second-best May ever, with May 2009 at 9.3% still #1.  Back-to-back 5%+ months for the first time since March and April 2016 when we bounced hard off the February bottom.

It was only the 4th time the MLP Index had consecutive 5%+ months, with the other two times occurring in 2009.  A move like we are experiencing is rare for the MLP space, reserved for the big historical inflections in sentiment and fundamental outlook, which bodes well for the near-term sustainability of the rally.  MLPs are now up 13.6% this quarter.  If MLPs are flat through June, 2Q performance would rank just outside the top 10 for biggest quarterly performance for AMZ (19.7% is the best ever).
AMEI likewise had a 5% May after a strong April, and is on track for a strong quarterly return if the rally holds.  AMEI still trails the AMZ year-to-date, dragged down by weaker performance from Canadian and utility constituents.

June and July have historically been above average months for AMZ and AMEI performance, and June has been positive in 6 of the last 8 years for each index.
Winners & Losers
Normally the top 5 best performing MLPs will include a non-midstream name or a smaller, less followed name, but that is not so this week.  Familiar, well-followed MLP Index constituents make up the entire top 5 this week.  NS led all MLPs and ENLK was close behind with a double-digit gain as well, despite neither having any news.  ENBL and CEQP had no news either, but have shown more consistent outperformance so far this year.  NGL was alone in the top 5 with the news of quarterly results, a large asset sale and fresh guidance.  The market seemed eager to believe NGL’s guidance, despite consistent and wide guidance misses over the last few years.  GMLP was the worst performing MLP, collapsing Thursday and Friday after sponsor concerns and distribution uncertainty.

ENBL and CEQP repeated in the top 5, while DM made the bottom 5 again this week.  On the year-to-date leaderboard, CEQP is alone at the top with a 37.5% total return this year.  ENBL also joined the top 5, displacing TOO.  GMLP’s blowup this week landed it a spot among the biggest losers so far this year, although TCP and DM remain in a tight race for the bottom spot.

General Partners & Midstream Corporations
The median performance of GPs and U.S. midstream corporations outperformed the MLP and midstream indexes this week.  GPs of top performing MLPs led the GP and midstream corporation group with similar double-digit gains from NSH and ENLC.  Two other GPs with strong underlying MLPs where simplification is expected (AMGP and WGP) also traded well on no news.  The only negative stock in this group was WMB, which has traded sideways after its simplification announcement, which somewhat parallels the action in OKE early in 2017 after its simplification announcement.  Time will tell if WMB can trade better ahead of the close of its simplification or if it will continue to linger until the deal closes or if it lingers even after the deal closes.

AMGP and TGP outperformed for a second straight week.  PAGP had a positive week, but was among the bottom 3 performers in this small group after 1Q results took some wind out of its sails.  Analyst day next week may spark further enthusiasm.  Year-to-date, the top 3 stayed at the top with OKE and LNG padding their lead on the rest of the group.  WMB fell a few spots while NSH and SEMG climbed a few spots.  KMI had a good week but is still in the bottom 5.

Canadian Midstream Corporations
Canadian midstream performance was not as tightly-bunched as usual this week.  The Trans Mountain sale created uncertainty on the future of KML and sent its share price lower.  The biggest two companies (TRP and ENB) were also negative on the week.  The smaller players with more gathering & processing exposure (KEY and Pembina) traded well.

Pembina’s analyst day and slight upward guidance revision seemed to help its performance this week, but more clarity on the future of Trans Mountain’s expansion probably also helped improve the long term outlook for those midstream operators with gathering & processing exposure in Alberta. Keyera outperformed for a second straight week, and has now taken over the top year-to-date spot and is the only positive performer in Canadian midstream this year.

News of the (Midstream) World
Huge asset sales were again the biggest news items of the week and have replaced equity offerings as the new periodic financing method for midstream companies with funding gaps.  Also, on the fringes of the sector, MLPs continue to leave the MLP structure, with two more this week.

Capital Markets

  • Nothing.

Growth Projects / M&A

  • Kinder Morgan (KMI, KML-CA) announced sale of the Trans Mountain Pipeline system and the expansion project to the Canadian government for C$4.5bn (press release)
    • The government has agreed to fund the resumption of the expansion planning and construction work for the expansion and will attempt to sell the pipeline when regulatory uncertainties diminish
    • KMI still expects to meet or exceeds 2018 DCF/share target and 25% dividend growth through 2020
  • NGL Energy (NGL) announced the sale of remaining retail propane business to Superior Plus (SPB) for $900mm (press release)
    • The price implies a 2018 EBITDA of more than 10x
  • CVR Energy (CVI) announced offer to exchange CVI shares for up to 37.2mm units of CVR Refining (CVRR) (press release)
    • The exchange ratio of 0.6335 implies a CVRR value of $27.63, representing a 25% premium over the prior day closing price
    • If all of the potential units are exchanged, CVI and its affiliates will own 95% of the outstanding CVRR common units
    • CVI believes that many CVRR unitholders may wish to hold their investment in the form of common stock rather than partnership interests
    • While this exchange doesn’t eliminate CVRR at the moment, it likely leads to a full buyout eventually
  • Enterprise Products (EPD) and Navigator Gas announced construction for their 50/50 ethylene export terminal JV is under way and is expected to begin commercial operation in 4Q19, one quarter earlier than previously expected (press release)
  • Energy Transfer’s (ETP) Rover Pipeline received FERC approval for Mainline B pipeline segments allowing 100% of Rover’s mainline capacity to be placed into service (press release)
  • ETP announced a binding open season for additional commitments up to 50,000 bpd on Permian Express 3 (press release)
  • Kimbell Royalty Partners (KRP) announced the acquisition of the mineral and royalty interests from Haymaker Minerals & Royalties for $404mm (press release)
    • KRP funded the acquisition with $210mm in cash via a private placement of convertible preferred units and 10mm common units of KRP valued at $194mm
    • KRP also announced its intention to “check the box” to change its MLP status to a taxable entity
  • Global Partners (GLP) announced the acquisition of 10 gas stations and convenience stores from Cheshire Oil Company (press release)