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March 25, 2018

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Week Thoughts: Market Trumps Midstream

Another rough week in Midstream, the worst in nearly 2 months. Midstream and MLPs overall did outperform the S&P 500, though, which had its worst week 2+ years.  MLPs fared the worst, down 5.5%, U.S. midstream corps were down 4.2%, matching the AMEI index (proxy for midstream universe), and Canadian Midstream outperformed both.

The MLP Index traded up just one day this week and has declined 7 of the last 9 days.  The MLP Index closed at a new 52-week low, its lowest point since mid-February 2016.  Excluding extreme volatility in 1Q 2016, the MLP Index hasn’t been this low since September 2009.  It’s not just MLPs hurting either: KMI hit a 52-week low to close out the week, also its lowest price since mid-February 2016.
Oil prices tried to help.  Oil closed the week at an 8-week high, helped by OPEC commentary and a strong oil inventory report.  Natural gas sank lower, even with a too close to Easter nor’easter.
Big Questions
The big questions this week from colleagues and clients (reminder: we manage money in Infrastructure, Midstream and MLPs on behalf of institutions):

  • Are all MLPs just going to convert to corporations?
  • What gets the sector to trade better?

The big, important, non-dropdown MLPs will eventually convert into tax-payers in one way or another.   FERC’s decision will accelerate the trend Kinder Morgan started in 2014.  There will still be MLPs, and probably some very good ones, that can gain a following once the market becomes less dominated by ETF flows.
As to the second big question, the sector can trade better if a few potential catalysts come through: third party M&A, value investors and execution.  A private equity bid for an entire MLP would be positive.  Finalization of pending MLP simplifications would also help, because the overhangs of uncertain GP/LP combinations is keeping cash on the sidelines.
Warren Buffett or other big-name value investors sniffing around could be a catalyst (it was last time MLPs traded at these levels).  Another solid quarter of earnings/results with positive outlooks flowing through into actual results (and signs of progress on promises of self-funding efforts) can help if midstream stocks continue to flail around until 1Q results.
Smaller Questions: Last One Out Please Turn Out the Lights
The market consensus appears to be WPZ will be bought out by WMB within the next few months, or at least will check the box to be taxed as a corporation.  EQM’s sponsor has already said that the ultimate spin-off owner of EQGP/EQM/RMP will be a corporation.  TEP’s simplification process likely results in tax-paying TEGP as the surviving entity.  EEP and TCP seem destined to exit the MLP structure as well.
Beyond the easy ones, others are running the math and assessing large unitholder capital account implications of becoming a corporate tax payer.  So, the questions this week ask you to look ahead roughly 18 months and make some calls.
Sorry, there are no polls available at the moment.
Sorry, there are no polls available at the moment.
The easy analogy to make this week would be another related to snow.  Just as I started to see some green grass poke through on the lawn, another foot of snow gets dumped on us.  The relentless winter keeps pounding us.  But, that analogy doesn’t really work, because not matter how endless this winter seems, we definitively know it won’t be snowing in June.  Can’t say with certainty much of anything about Midstream these.  Winter is seasonal, not secular…
A more fitting analogy this Spring Break, with my wife and older two kids in Amsterdam for the week, is the story of the Dutch boy and the dike, “the Hero of Haarlem”.  The story goes that a boy saved the country by plugging a hole in the dike with his finger over a cold night until others came to help.  It was first published within the “Hans Brinker” published in 1865, per Wikipedia.  Below is a picture of one of three statues in that country memorializing the fictitious hero.

There’s been many representations of this classic tale, often played for humorous effect (e.g. when Clark Griswold plugs a leak in the Hoover dam with multiple pieces of chewing gum).  A more recent example is the squirrel Scrat in Ice Age 2, who pulls out an acorn and water spurts out, then he plugs that and subsequent holes with his finger until eventually the water comes gushing through and crushes him.

Lately, Midstream feels like an ongoing attempt to plug holes that continue to emerge, with FERC and now broad market volatility appearing most recently.  It remains to be seen how the Midstream story ends, but help needs to come soon, because we are clearly out of fingers at this point.
Winners & Losers
There were only 4 positive MLPs this week, and the best performing name in the MLP Index was PAA, which continues to trade well this year (relatively) after a brutal 2017.  FERC-uncertain MLPs (SEP, BPL eventually), drop-down MLPs (BPMP, SHLX), or both (DM) dominated the biggest losers.

DM’s fall this year has been staggering, down 25% this week after 15% last week, and down 46% so far this year.  DM is now by far the worst performing MLP.  Sponsor D has some levers to pull to attempt to salvage the once very functional drop-down MLP, but the market is clearly not willing to wait to hear what the potential path forward is for DM, having been burned before by orphaned drop-down vehicles.  There are now 4 MLPs with more than 30% declines to start the year, and the first quarter isn’t even over yet.

General Partners & Midstream Corporations
Every single midstream corporation and general partner was negative this week, but the group outperformed on an equal-weight basis.  OKE and KMI were barbells on the top and bottom.  KMI’s spot at the bottom feels a bit out of place given the rest of the bottom 5 have MLP subsidiaries, but it shows how associated with the MLP sector KMI remains.

TRGP, AROC and AHGP have outperformed the group through these last few volatile weeks, but YTD OKE and PAGP remain in the lead.

Canadian Midstream Corporations
Canadian Midstream outperformed U.S. midstream, but the biggest players with the most assets in the U.S. (TRP and ENB) were the worst performers.  GEI had a rare news-related stock price move, trading up after announcing asset sales.

TRP has underperformed for two straight weeks, and has started drifting lower on the YTD leaderboard, this week hurt by FERC fallout.

News of the (Midstream) World
Very light news week.  Don’t expect that to continue, given pending simplifications and asset sales.  Progress on those fronts would be welcomed by the market.

Capital Markets

  • Pembina (PPL-CA) announced $700mm of senior unsecured notes (press release)
    • $400mm of 4.02% notes due 2028
    • $300mm of 4.75% notes due 2048
  • Bechtel made a $50mm zero coupon preferred equity investment in Tellurian (TELL) with an implied common share price of $8.16 (press release)

Growth Projects / M&A

  • TransCanada announced successful completion of an open season for its NGTL export capacity (press release)
    • The system offered 280 MMcf/d and was oversubscribed with an average contract term of 22 years
  • Gibson Energy (GEI-CA) announced two separate divestments of its US energy services businesses, including US Environmental Services and its US Seismic Assets, for $96mm (USD) (press release)
  • Tellurian (TELL) announced non-binding open season to secure shippers for proposed 42-inch interstate natural gas pipeline connecting Permian Basin to Southwest Louisiana (press release)
    • The pipeline, Permian Global Access Pipeline, is estimated to cost $3.7bn and will have capacity to transport 2 Bcf/d
    • Construction expected to begin as early as 2021 with an in-service date as early as 2022
  • GasLog Partners (GLOP) announced the purchase of Gibraltar, a 174,000-cubic meter tri-fuel diesel electric LNG carrier, from GasLog Ltd. (GLOG) for $207mm (press release)
    • GLOP expects the dropdown to be immediately accretive to DCF/unit and will add $22.4mm of EBITDA in the first 12 months after closing, implying a 9.2x multiple
    • Acquisition financed with $58mm in cash and $149mm of assumed debt
    • GLOP will also repay its $45mm unsecured term loan with 9.125% interest from GLOG with $45mm of new privately placed common units


  • Golar LNG Limited (GLNG) and Golar LNG Partners (GMLP) announced that Brian Tienzo, CFO of GLNG, will step down and become the CEO and CFO of GMLP and Graham Robjohns will step down as CEO of GMLP and become the CFO and Deputy CEO of GLNG (press release)