More pain for midstream and MLP stocks this week. The negative factors from last week remained, but oil prices piled on this week. Oil prices are on a 6-day losing streak and broke below $60/bbl Friday. Stocks were volatile, and midstream/MLPs held up ok on a relative basis and have been a decent place to hide the last few weeks if you avoided the biggest losers in the group.
The MLP Index crossed into negative territory YTD this week. MLP outperformance relative to the S&P 500 and other midstream corporations is bleeding away, not helped by ongoing reminders of corporate governance, financial and operational challenges facing the group.
While the market entered 2018 with optimism after substantial progress on leverage, coverage and IDRs in 2017, we got a few reminders this week of challenges that remain. IDR eliminations still need to happen, and they tend to be:
With still several large potential IDR eliminations out there (TEP, ETP, DCP, EQM, WES, AM), it’s hard to get excited about owning MLPs ahead of those transactions.
Bottom line: while MLPs were impacted negatively by broad market trading this week, MLPs aren’t doing a great job of helping themselves. The majority of MLP earnings releases this week contained negative 2018 guidance revisions, and there was more than one case of general partners behaving badly.
Maybe next week will be different, maybe earnings from the likes of DCP, WES, WPZ, ANDX will provide some more positive data-points. A number of Canadian midstream companies also report (TRP, ENB and Keyera), which will offer them an opportunity to remind the market of their generally more defensive structures that haven’t attracted interest from investors.
With so many IDR simplifications pending and special committee negotiations to be had, it is important to remember a few things about the relationship between GPs and their MLP subsidiary:
If you Don’t Know Now You Know
Also, it is worth reminding, MLPs have cut their distributions. It should not be a surprise at this point. Online this week, I was surprised to see those surprised when NS management said 54 MLPs have cut their distributions the last few years. As we discussed last year in a paper published here, some MLP marketing machines have tried to whitewash with distribution growth charts showing only positive annual numbers.
We counted 56 distribution cuts just among MLPs that were in the Alerian MLP Index. And that was as of October 2017. These aren’t just marginal asset MLPs (E&P, coal, refinery, etc.), these are the pipeline guys, with “toll-road” like cash flows. Prominent names like PAA (twice), ETP (stealth cut into SXL), WPZ (twice – one stealth cut, one outright cut), EEP, GEL, and even OKS (small stealth cut).
Fly Eagles Fly
For those of us in the Philadelphia area, the week never really got started… After outlasting the Patriots in a Super Bowl shootout Sunday night, it was one big victory lap that devolved into a blur of celebrations, snow days and parades.
Congrats to long-suffering, green-bleeding Eagles fans everywhere who got the monkey off their back, while simultaneously diminishing the New York Giants stature as the only team to beat Tom Brady’s Pats. Well done, we’re all real happy for you…now if we can get back to normal, or at least get the essential services of the city back online, that would be great…
Winners & Losers
Earnings was a driver of divergent performers on both sides this week. PAA led all MLPs by a wide margin after lowering 2018 guidance, but also announcing lower leverage on accelerated asset sales. SPH’s results were well-received as well.
On the other side, worse than expected earnings and lowered guidance slammed NGL and NS (-45% distribution cut from NS didn’t help). TEP’s surprise announcements around structure and a diverted drop-down were also not well-received.
On the year to date leaderboard, CCLP and CNXM remain at the top. The group of losers YTD got 3 new members this week (TEP, NS and DM).
General Partners & Midstream Corporations
In the GP and corporation group, PAGP was the sole positive stock this week. NSH’s merger announcement at a tiny premium sent its stock price tumbling lower and erasing any valuation gap that had opened up between NSH and NS to start the year. TEGP was volatile, but landed somewhere in the middle.
Cheniere took over the top spot in this group YTD this week after announcing another LNG offtake contract announcement. NSH had been the best performer of the group through last Friday, but was crushed this week. OKE and WGP are clinging to positive returns year to date.
KML again was the best performer in Canadian midstream, the only positive stock in a group that was mostly down 5%+.
KML extended its YTD lead relative to the rest of the group. ENB outperformed, and climbed a few spots as others fell back to join ENB with double digit losses so far.
News of the (Midstream) World
No equity deals this week, but plenty of other news alongside earnings announcements. Expect more of the same next week. Simplification wave is continuing to wash over the sector, expect that steady flow to continue with the likes of WES, ETP, DCP, EQM among others still pending. Notable, however, that customer demand is there for additional development of infrastructure like processing plants (TRGP) and LNG offtake (Cheniere).
Growth Projects / M&A
Only four MLP distribution announcements this week, and we’ve had 81 so far in my database. Expecting another 5 announcements in the next few weeks. The chart below doesn’t include NS’s distribution cut, which doesn’t officially happen until next quarter.