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April 8, 2018

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Week Thoughts: Midstream Off the Blacklist?

Amidst broader market volatility, midstream held up and outperformed this week.  Relative strength for midstream happened Monday when market was down big and on Thursday when the market rebounded.  I’m going to try not to get too excited about a single week, but an optimist (e.g. myself from 2015) could see a path towards a midstream bottom if growth stocks in the broad market lose their luster and investors begin seeking value in beaten down sectors like energy.

Midstream was able to shrug off propane being included on China’s retaliatory list in the emerging trade war, although big propane exporters EPD and TRGP underperformed on Wednesday when that news came out.  China is an increasingly important market for U.S. hydrocarbons and byproducts, and disruption of that demand could have ramifications up the NGL value chain, but for now disruption appears unlikely.
In summary, it was a quiet week for Midstream.  Despite some small positive signs, a rebound in April will just confirm historical seasonal trends.  It remains to be seen whether investors are ready to take midstream and MLPs off their blacklist.
Time will tell and may eventually heal some still fresh wounds.  In a few weeks, we can hope to see signs of execution in 1Q results.  Perhaps we’ll get resolution on pending simplifications or potentially even some third-party M&A.
Another Philly Championship
In the category of cherry-picked statistics from local sports: Villanova’s NCAA win could be a positive for MLPs.  Villanova has now won 3 NCAA basketball championships: 1985, 2016 and 2018.  In 1985, MLPs didn’t really exist as they do today, so we can throw that one out.  But, the last time Villanova won (2016) was also the last positive year for the MLP Index.  Coincidence? Definitely.
Winners & Losers
Several positive outliers among MLPs this week, but each of the top 5 are smaller MLPs that are not in the MLP Index.  Several shipping MLPs traded well (TOO, DLNG, HMLP), which runs counter to the narrative of the week on global trade concerns, although each of those has limited exposure to China directly.  On the bottom 5, TCP was the biggest losers, but the rest of the top 5 were younger sponsor-backed MLPs, including 3 producer-sponsored MLPs (NBLX, RMP, AM).

PAA’s outperformance continued this week, and PAA has crept into 3rd best performing MLP overall this year, and the largest MLP among the top 5 by far.  The bottom 5 year to date didn’t change much week over week.

General Partners & Midstream Corporations
Among general partners and midstream corporations, PAGP was far and away the best performer.  PAGP traded well this week on broadly reported data from Genscape that indicates Permian pipeline capacity is very tight right now, a clear benefit to the largest Permian pipeline player (PAA/PAGP).  Notable among the top performers in this group, 4 of 5 (LNG excluded) have already simplified and eliminated their MLP subsidiaries or IDRs.

Year to date, LNG is the only stock in the top 5 with an IDR structure in place.  LNG is little impacted by its structure at this point.  Being past the point of simplification seems to be a positive performance factor in this group.

Canadian Midstream
Canada was mixed, but generally inline with U.S. performance.  Pembina was the worst performer, and seems to be suffering from some rotation after being the best performing stock in Canadian midstream in 2017.  Keyera’s processing announcement with Encana was well-received, offering hope that (in Canada at least) growth announcements can be positive catalysts.

On the year overall, the larger stocks are underperforming, and it appears the biggest two Canadian players are experiencing a discount due to complexity or structural overhangs.  Also, with oil prices within Canada significantly discounted in 1Q compared with U.S. oil benchmarks, there was little fundamental support.  That differential has narrowed, hopefully driving interest back to the energy sector in Canada.

News of the (Midstream) World
Light news week, but there were signs that assets sales trend discussed above is underway in Canada.  Expect news flow around pending simplifications to heat up over the next several weeks, perhaps culminating in some kind of strategic announcement by Williams around its analyst day in a month.  MMP has an analyst day 4/10, which will offer one of the first opportunities to hear directly from a marquee MLP on FERC and other MLP structural challenges.

Capital Markets

  • Targa Resources (TRGP) priced upsized $1.0bn offering of 5.875% senior notes due 2026 at par (press release)

Growth Projects / M&A

  • Encana and Keyera (KEY) announced 20-year agreement whereby Keyera will acquire and fund the remaining development of Encana’s Pipestone Liquids Hubs and planned processing plant (press release)
    • The liquids hub will include a total of 14,000 bpd of condensate processing capacity and is estimated to cost C$105mm
    • The plant will include a total of 200 MMcf/d of sour gas processing capacity and 24,000 bpd of condensate processing capacity and expects preliminary capital of C$500-600mm
    • Encana will manage the design, construction, and initial operation and Keyera will oversee all commercial and ownership activities
  • Buckeye (BPL) announced an $80mm expansion of the Chicago Complex, backed by a long-term agreement with BP Products (press release)
  • Buckeye (BPL) announced it will move forward with bi-directional service in response to the Pennsylvania Public Utility Commission’s recommendation to reject BPL’s application to abandon east-to-west service entirely (press release)
  • Sunoco (SUN) announced the acquisition of the wholesale fuel distribution and terminal business from Superior Plus Corp for $40mm (press release)
    • The three terminals have a combined storage capacity of 429,000 barrels and the wholesale fuels business sells 200mm gallons of fuel annually

Other

  • Bloomberg reported on developments in the asset sales plans of Enbridge (ENB) including:
    • ENB hired a banker to sell Western Canada gas assets that could fetch $2bn Canadian (Bloomberg)
    • ENB is seeking to sell 50% of its 50% stake in German offshore wind farm development (Bloomberg)