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April 29, 2018

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Week Thoughts: Gains Carryforward into Earnings

After back-to-back 3% weekly gains, MLPs traded up slightly for a third straight week, slightly ahead of the S&P 500.  As discussed last week, MLPs haven’t had 3% gains 3 weeks in a row ever, so this week’s pause is not a surprise, especially with flat broad market and oil prices.

Midstream more broadly didn’t fare as well, with Canada trading down and some of the larger non MLP Index names traded down after recent strength.  Year to date, MLPs are outperforming broader midstream, helped by the strong January and consistent underperformance by Canadian midstream companies.  MLPs are also having a big April relative to the AMEI (7.8% vs. 4.8%).
Earnings so far have been positive, with the Marcellus midstream players (AM and EQM) posting strong results, even as basin differentials remain wide and Permian associated gas looms large.  Next week, we get a deluge of earnings (EPD, WMB, OKE, TRGP, MPLX…) that can potentially further the fundamental improvement and quarter-over-quarter execution narrative, and keep the positive midstream vibes going.
Poll Question Recap – Not Simple Enough
Last week, I was hopeful we’d see a rash of obvious simplification announcements (EQM, WMB, AM, DM, TCP) and asked reader how many we would get.  37% of respondents said we would get none, 31% said we’d get one, and just 10% said more than two.
In the end we got just one (EQM/RMP) that disappointed the market and still has another few steps to go.  We did get an indication that DM would collapse its IDR structure in the future (if Dominion chooses to continue its MLP strategy once FERC details emerge).
In general, the releases and conference calls offered few updates. Management teams (Antero in particular) fielded streams of simplification questions and deflecting each one.  It reminded me of Forrest Gump, who would punctuate his stories by saying, “That’s all I have to say about that.”

Impatience aside, midstream simplification and corporatization is going to continue.  The slow death of the IDR structure is long-term positive for the sector, because removing IDRs will better position the sector for growth going forward (after the upfront dilution or stealth cuts).  Simpler companies with midstream assets may also clear the way for consolidation and management turnover, which would also improve the outlook for the sector.
Winners & Losers
Of the 5 best performing MLPs this week, just MMLP had news this week, reporting 1Q results that the market was pleased with.  The bottom five had a few more catalysts.  DLNG continued to decline after last week’s distribution cut.  SXCP dropped on its distribution cut this week.  EQM also declined despite strong results, as the market digested the latest (and not final) step in the stream-plification process.

MMLP joined the top 5 on the YTD leaderboard, after a second straight big week.  There were no changes to the ranks of the bottom 5.

General Partners & Midstream Corporations
GPs and midstream corporations were mixed this week.  The biggest winners from last week (TEGP, KMI, ETE) lagged this week, while others in the group caught up.  AMGP had a strong week, with solid AR and AM results outweighing lack of progress on simplification.

AROC closed its acquisition of APLP and led the way.  Going forward, now that AROC is no longer associated with an MLP, I won’t be including AROC in my charts, because its assets are more oilfield services than midstream.
On the YTD leaderboard, OKE reclaimed the top spot and AMGP climbed out of the bottom 5.

Canadian Midstream
Canadian midstream underperformed the U.S. group again this week.  ENB was at the bottom again this week, with most of the decline happening on Monday when the Minnesota ALJ complicated the approval process for ENB’s Line 3 Replacement project.  Pembina was the best performer of the group.  With the Toronto Stock Exchange not functioning after 1:39pm Friday, the market didn’t have much chance to react to commentary from TransCanada’s quarterly conference call that began at 3pm.

There is not a single positive midstream stock in Canada this year.  Inter Pipeline and Gibson fell back into the group of other companies with negative double digit returns.

News of the (Midstream) World
Refinery-backed midstream players ANDX and PSXP got a big project win this week with Gray Oak Pipeline, finally able to leverage their downstream operations into the Permian pipeline game that’s been dominated by independent players like EPD, MMP, PAA and ETP.
Capital Markets

  • None.

Growth Projects / M&A

  • EQT Midstream Partners (EQM), EQT GP Holdings (EQGP), and Rice Midstream (RMP) announced multiple “streamlining” transactions (press release)
    • EQM will purchase EQT Corp’s (EQT) retained midstream assets and Gulfport Energy’s (GPOR) 25% ownership in the Strike Force Gathering system for $1.7bn
      • In return, EQT will receive $1.15bn in cash and 5.9mm EQM common units and GPOR will receive $175mm in cash
    • EQM and RMP will merge in a unit-for-unit transaction at an exchange ratio of 0.3319x, which implies an equity value of $2.1bn and a 10% premium to RMP
    • EQGP will purchase RMP’s IDRs from EQT for 36.3mm EQGP common units, or $937mm
    • The transactions are expected to be immediately accretive to EQM and EQGP’s DCF/unit
    • EQM expects to grow distributions 15-20% with no equity through 2020, even with IDRs still in place
  • Phillips 66 Partners (PSXP) announced plans to move forward with construction of Gray Oak Pipeline following sufficient commitments, also announced new open season for additional capacity (press release)
    • Gray Oak is a JV owned 75% by PSXP and 25% by Andeavor (ANDX) with other third parties including Enbridge (ENB) having an option to acquire up to 32.75%
    • The pipeline will provide crude oil transportation from West Texas to Corpus Christi and Sweeny/Freeport markets and is expected to be in service by the end of 2019
    • PSXP is holding a second open season to support capacity of 700,000 bpd, up from the project’s original 385,000 bpd, with the option of ultimately expanding capacity to 1mm bpd
    • No details on expected cost, but it is the largest development project ever undertaken by PSXP
  • Related to Gray Oak, Buckeye Partners (BPL) announced a JV with Phillips 66 Partners (PSXP) and Andeavor (ANDV) to develop a new deep-water, open-access marine terminal, the South Texas Gateway Terminal (press release)
    • The terminal will be located at the Corpus Christi Bay and is positioned to serve as the primary outlet for crude oil and condensate volumes delivered off the planned Gray Oak pipeline from the Permian Basin
    • The terminal will be constructed and operated by Buckeye, will have initial storage capacity of 3.4mm barrels, supported by long-term commitments, and is scheduled to be in service by the end of 2019
    • Capacity can ultimately be expanded to over 10mm barrels of storage
    • BPL will own 50% and PSXP and ANDV will each own 25%
  • The Minnesota Administrative Law Judge recommended approval of ENB’s Line 3 Replacement project, but recommends using the existing Line 3 route
    • ENB responds with a well-reasoned argument for its proposed alternate route that was confirmed to be the least impactful to the environment based on the Environmental Impact Statement (press release)

35 distribution announcements this week.  Three distribution cuts, including two from NuStar that were previously announced, and one from SunCoke Energy Partners (SXCP).  Also notable, CQP raised its distribution 10%, which puts CQP into the 25% IDR tier, with another 16% to get to the 50% IDR tier.  Finally, ETE stopped growing its distribution this quarter after 2 quarterly increases.