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June 24, 2018

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Week Thoughts: Midstream Eases Higher

Midstream and MLPs traded well this week, but not as well as you’d expect given a 5%+ oil move and strength in income securities (like utilities).  The OPEC meeting Friday turned out to be a catalyst despite no surprise, because of how well-managed expectations were.  Oil, energy stocks and MLPs were sharply higher Friday, and the Dow finished positive for the first time in 9 days.

The MLP Index is +10.9% off the bottom in late March (+13.1% with distributions), but it’s traded sideways for the last month. Midstream corporations outperformed MLPs this week: not a single midstream corporation was negative.
If oil prices follow through and hold Friday’s gains, expect MLPs to catch up to broader energy stocks.  It tends to happen that MLPs react on a delayed basis to broader energy inflections.  It could be because of the market’s disinterest in midstream at the moment.  As the chart (borrowed from a note from the sales desk at RBC) below shows, volumes for the AMZI index were at multi-year lows around the middle of this week.

Capital Intensive Infrastructure Needed
Constraints in the Permian continue to be the topic of focus for the sector, with concerns on the oil and gas side given wide differentials, although oil differentials tightened up this week.  The Texas Railroad Commission has communicated via meetings with the research community that it can be expected to continue to be very accommodative on granting gas flaring waivers for well beyond 180 days.
The relative ease of flaring in Texas may be slowing the progress for additional gas takeaway projects, because producers don’t have a pain point to move them to commit to a pipeline when the gas production growth is largely associated in the region.  Vertical wells that depend on gas prices in the region can also be shut-in.
But infrastructure needs remain very large for North America for the foreseeable future.  This week, INGAA released an update to its 2016 study on North America Midstream Infrastructure Through 2035.  The updated study suggests that midstream infrastructure spending will total more than $800bn and average $44bn over the next 18 years, including a peak in 2019 of more than $100bn.  This is after an average of $63bn in annual spending over the last 5 years.  These numbers are staggering, considering the existing energy infrastructure than spans this country is already more developed than any country in the world.
The report can be read at INGAA’s website (link).

Midstream 2.0 Model Critical
The structural changes we are seeing within the midstream sector are at least partially an effect of the massive spending that needs to be financed.  The spending needs of the last decade overwhelmed balance sheets, coverage ratios and the depth of the retail common equity markets.
Cleaned up structures, excess cash flow from higher coverage rations, and private equity will need to be heavily leaned on to fund such a high level of capital spending.  Producer commitments, a benign regulatory environment, and global demand growth will also need to be there to ensure returns are there to sustain the infrastructure buildout longer-term.
Even after identifying need for infrastructure and after getting commitments, permitting and construction remains challenged in several regions outside of Texas.  ETP’s struggles in Pennsylvania are well-documented, ENB might get some resolution on the Minnesota portion of the Line 3 Replacement project in the next week, and suddenly the timeline for Mountain Valley is being challenged in West Virginia.
As always in midstream: lots of opportunity and lots of uncertainty, with large rewards for actively-positioning investment dollars into the stocks of the winners.
I’m Doing My Part
Note: these numbers do not assume any infrastructure needed to support the development of the United States Space Force that President Trump directed the Pentagon to create this week.  Unclear if that directive was made after he re-watched 1997 film Starship Troopers.  In that film, service in the mobile infantry guaranteed citizenship, but also unclear at this point if that will be the case for our Space Force.


Winners & Losers
Wide variation in MLP performance this week.  On the winning side, some of the worst performers YTD were some of the best performers this week (e.g. TCP, CAPL, DM).  OMP had a positive guidance update that helped it gain some traction this week.  SRLP led all MLPs on no news, but it was the worst performer last week on no news last week.  ENLK was weak as the market digests the news of its new sponsor situation.  Also, two coal names made the bottom 5 (CNXC and ARLP).

The YTD leaderboard is tightening up at the top with less than 5% separating each of the top 5.  CEQP reclaimed the overall lead, NRP dropped a few spots and PAA was replaced by ENBL in the top 5.  SHLX climbed out of the bottom 5 year-to-date, replaced by BKEP.

General Partners & Midstream Corporations
There were no negative performers in this group for the week.  NSH and TRGP went from near the bottom of the group to the top of the group this week, helped by a bounce in oil prices.  AMGP also bounced back from bottom 5 last week.  LNG continues to see strength and continues to progress on simplification with strong fundamental tailwinds.   ETE, WGP and PAGP lagged a bit this week for no clear reason.

KMI was near the top of the group for a second straight week, gaining some momentum following the sale of Trans Mountain a few weeks ago.  Year-to-date, OKE, LNG and PAGP remain best-in-class, but TRGP jumped ETE for 4th place this week.  Among the losers so far this year, SEMG continues to trail and is now the only double-digit negative returning stock in the group.

Canadian Midstream Corporations
A wider than typical range of performance among Canadian midstreamers this week.  TRP led the way with a 4% gain, while ENB dropped a bit as Line 3 replacement hearings began in Minnesota.  A decision is still expected on that project in the next week or so, and I’d expect more volatility as reports are published on the hearings.

Year-to-date, Keyera is back in the green and is the only Canadian midstream stock that’s green in USD for the year.  Pembina is closing in on positive returns as well.  KML’s fall following the sale of Trans Mountain continues, and it is now second to last in the group.

News of the (Midstream) World
Clean-up transactions continue to make progress.  This week Cheniere announced agreement with CQH, OCIP agreed to revised takeout terms, CVRR sponsor commenced exchange offer, and next week TEP unitholders will vote on the pending merger with TEGP.  Many more structures to clean up across the sector (e.g. NSH/NS merger vote in set for July), but each week we seem to make a little progress.
Although a little outside of traditional midstream names, integrated utility Sempra Energy hosts an analyst day this week just a few weeks after an activist publicly called for major strategic changes.  It will potentially be interesting to hear how management responds to the suggestions that included selling high-quality LNG export and Mexican midstream assets.

Capital Markets

  • LNG export development company Tellurian, Inc. (TELL) priced public offering of 12.0mm shares at $9.90/share, raising $118mm in gross proceeds (press release)
    • Overnight offering, priced at 9.9% discount to prior closing price, traded down additional 3.4% in the next session
    • It was TELL’s second equity offering in a little over 6 months, raised $115mm at $10/share in December
  • EQT Midstream (EQM) priced offering of $2.5bn of senior notes (press release), including:
    • $1.1bn of its 4.75% senior notes due 2023 at 99.761% of face value
    • $850mm of its 5.5% senior notes due 2028 at 99.538% of face value
    • $550mm of its 6.5% senior notes due 2048 at 99.055% of face value
  • ONEOK (OKE) priced offering of $1.25bn of senior notes (press release), including:
    • $800mm of 4.55% senior notes due 2028
    • $450mm of 5.20% senior notes due 2048
  • Keyera (KEY-CA) priced $400mm of 3.934% senior notes due 2028 (press release)

Growth Projects / M&A

  • American Midstream (AMID) announced sale of its marine products terminalling business to funds managed by JP Morgan Asset Management for $210mm in cash (press release)
    • Assets sold include the Harvey and Westwego terminals located in the Port of New Orleans and the Brunswick terminal located in the Port of Brunswick in Georgia
  • Cheniere Energy (LNG) announced definitive merger agreement with Cheniere Energy Partners LP Holdings LLC (CQH) for all stock merger (press release)
    • CQH holders will receive 0.475 LNG shares for each share of CQH in a transaction valued at $30.93/unit based on 6/18 closing price
  • TransCanada (TRP) announced FID for $140mm expansion of its NOVA Gas Transmission (NGTL) System following successful open season in March (press release)
  • GasLog Partners (GLOP) announced new charter agreement with Cheniere Energy (LNG) (press release)
    • Multi-year time charter agreement for the 155,000 cbm LNG carrier GasLog Sydney, a 2013-built LNG vessel currently on a multi-year time charter agreement with Shell through September 2018
  • OCI Partners (OCIP) announced revised agreement with sponsor OCI N.V (OCI) to acquire all outstanding common units for $11.50/unit, conflicts committee recommends unitholders accept the revised offer (press release)
  • EQM – Federal appeals court issued a stay delaying construction on parts of the Mountain Valley Pipeline (being developed by EQM and partners) in West Virginia and EQM responded late Friday night (press release)
    • Stay puts construction in southern West Virginia on hold to evaluate environmental benefits of the proposed and previously approved dry-ditch construction technique
    • Construction activity can continue outside of impacted waterways
    • EQM, RMP and EQGP were all down on Friday in reaction, company responded late Friday night expressing disappointment and continues to target late 2018 in-service date while evaluating its options after this setback

Other

  • Blackstone Minerals (BSM) announced CFO Jeff Wood was named President (press release)
    • No other changes to senior leadership team; Thomas Carter remains CEO and Chairman
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