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June 16, 2018

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Week Thoughts: Low Energy MLPs

The week started strong, with MLPs up 1.6% Monday, but then followed up with 4 straight negative days, culminating in a big Friday selloff (-2.6%).  Friday was the MLP Index’s worst day since March 19th, just a few days after the FERC ruling.  It was also the worst week for the index since that same week in March.  Unlike that week, there wasn’t any big midstream news that led to the drop.  The action this week was more related to the macro (i.e. China tariffs, the Fed, oil prices and positioning ahead of OPEC).

Utilities traded well this week, helped by activist news on Monday that sent SRE up 16%.  While SRE isn’t in the AMEI, another midstream-oriented utility that has underperformed this year, Dominion, traded well this week (+5.9%), maybe in sympathy with SRE, maybe on a positive Marcellus or natural gas midstream trade this week.
Dominion’s strong performance helped AMEI outperform the MLP Index. Large cap Canadian stocks outperformed as well.  AMEI’s relative strength this week is an argument for spreading your midstream dollars over a more inclusive universe of stocks, an argument we’ve been making repeatedly the last few years.
There was not a lot going on in midstream this week, so your outlook on the sector as an investor probably shouldn’t change just because prices dropped on “the macro”, unless you are strictly trading MLPs on technicals (the MLP Index closed the week back below the 200-day moving average). Absent some strategic transaction announcements, it will likely be another quiet week in midstream news, with stock whipped around by oil prices and trade concerns.
On the other hand, there is a lot going on this weekend away from the stock market, including opening games of the World Cup, the U.S. Open, Father’s Day, and rare non-rainy weather.  Perhaps would-be midstream buyers took off a bit early to partake in some of the above. I know I did.
Winners & Losers
CNXM beat all MLPs by a healthy margin this week, most of that came on Friday (+4.7%) on huge volume (20x normal), which may have been some index or option-related noise.  Of all the MLPs on the leaderboard for the week, just USAC had news (secondary sale).

CEQP’s poor performance this week knocked it off its spot at the top of all MLPs year to date, replaced by NRP.  CQP and CNXM climbed back up near the top with their big weeks.  PAA is hanging on to the top 5 and 20%+ returns for the year.  On the downside, TCP and DM were both negative on the week, still both down 50%+.

General Partners & Midstream Corporations
GPs and midstream corps outperformed MLPs this week on average.  There were only two positive stocks and WMB led the group with a 2% gain.  Permian-levered natural gas names TRGP and WGP underperformed.  Concerns that gas pipeline constraints could lead to reduced production outlook in the Permian appears to have gained some traction as a meme, starting this week.  Or, if you aren’t into that narrative, maybe TRGP just traded down because of oil and WGP is thinly traded and went down too.

Permian player PAGP was helped by the announcement of yet another Permian pipeline project, this one with XOM.  On the YTD leaderboard, just 4 in the group have positive returns and the median return of the group (-4.6%) is well below the MLP Index return for the year.  WMB’s solid week helped it climb a few spots from the bottom.

Canadian Midstream Corporations
ENB, like WMB above, has not traded well this year, but separated itself this week.  More commodity sensitive stocks like KEY and IPL were at the bottom.

Every midstream stock in Canada is negative for the year in US dollar terms.  ENB is still the worst performer so far, but after a few weeks of outperformance has narrowed the gap.

News of the (Midstream) World
Another week has passed with no resolution on the AMGP/AM strategic process, but expect an announcement soon.  The USAC secondary is the first action in a while for the equity market, and despite the large discount, it traded pretty well in the after-market, and could lead others to test the market this summer.  In other news, another big Permian pipeline is on the drawing board, PSX is expanding its downstream NGL infrastructure and ETP is still on hold in the exurbs of Philadelphia, a mere 17 miles from our offices.

Capital Markets

  • USA Compression (USAC) priced public secondary offering of 5mm units at $16.20/unit, raising $81mm for the selling unitholders, no proceeds to USAC (press release)
    • Overnight offering, priced at 9.9% discount, and traded up 0.3% in the following session
    • Units were owned by USA Compression Holdings, LLC, which is principally owned by Riverstone / Carlyle private equity funds
    • USA Compression Holdings still holds 7.6mm units or approximately 7.6% of the outstanding units
    • ETE and ETP also hold 12.9% and 26.6%, respectively, of all outstanding units
    • USAC joined the Alerian MLP Index through the re-balance Friday, which may have impacted timing of this deal for the sellers

Growth Projects / M&A

  • Phillips 66 (PSX) announced the expansion of Sweeny Hub consisting of two 150,000 bpd NGL fractionators in Old Ocean, Texas, additional NGL storage capacity, and associated pipeline infrastructure (press release)
    • The project is expected to cost $1.5bn and begin commercial operations in late 2020
    • Supply agreements have been secured for Y-grade NGL feedstock, including an agreement with DCP Midstream (DCP) which has an option to acquire up to a 30% ownership interest in the new fractionators
  • Plains All American (PAA) and ExxonMobil (XOM) announced JV to construct a pipeline to transport crude oil and condensate from the Permian to the Gulf Coast (press release)
    • The proposed creation be able to ship more than 1mm bpd and would originate in both Wink and Midland, Texas
  • Energy Transfer’s (ETP) Mariner East 1 (ME1) was approved by the Pennsylvania PUC to resume service while the construction halt on ME2 will continue (Reuters)