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Midstream had a disappointing week overall. Like last week, oil prices ramped up (albeit with strong backwardation) and MLPs under-performed broader energy stocks and utilities. The AMZ tracked the S&P 500 with a 1.4% decline, while the AMEI outperformed due to its exposure to Canadian midstream and utilities. Broader stock market weakness was likely a factor, along with the MLP Index re-balance and some capital markets activity in a generally thin midstream equity market these days.
Midstream price action was frustrating overall this week, and it reminded me of the jacket that was made famous a few weeks ago by First Lady Melania with the phrase, “I really don’t care. Do you?”
You guys are here reading about midstream and MLP stocks, so you obviously care. I’m here writing about midstream and MLP stocks, so I clearly care. But the market doesn’t always care, especially after the numerous false starts for midstream.
When the market doesn’t care (i.e. when net flows are stagnant), then when stock-specific news happens, money flows to that stock from sales of other stocks. Two specific news items highlighted the zero-sum market this week. First, when CNXM secondary offering priced mid-week, the next day several comparable Marcellus G&P names underperformed (AM/AMGP and EQM/EQGP/RMP specifically). Later in the week, ENB got positive news on the Line 3 project, which did not spark much broader interest in midstream, but rather ENB and its subsidiaries rallied hard while the rest of the group was stagnant.
Some of the lack of interest could be chalked up to end of the quarter dis-interest or window-dressing that could potentially reverse next week. In the second half, with time and ongoing evidence that midstream operators can capture benefits from production and demand growth in their financials, I expect a broader set of investors to care about midstream.
Status Update: Mixed Month
MLPs finished June negative, breaking a two-month positive streak. For the quarter, AMZ was up 11.8%, including distributions. It was the best quarter for MLPs since 2Q 2016. It was also the first positive quarter for MLPs since 1Q 2017, breaking the second longest streak of negative quarters in MLP history (6 quarters ending in 1Q 2016). Prior to this quarter, MLPs had been negative for 10 out of the prior 14 quarters. The big rally this quarter has the MLP Index back to nearly flat for the year overall (on a total return basis).
The AMEI index was positive for June, beating the MLP index handily. AMEI also finished better than MLPs for 2Q overall, but AMEI still trails the MLP Index year-to-date, because of the big lead MLPs jumped out to in January, especially vs. Canadian midstream and utilities. As a reminder, AMEI is a midstream index that generally includes 25% MLPs, 25% Canadian midstream, 15% utilities and 35% midstream corporations.
Winners & Losers
This week’s stock action was refreshingly impacted by actual news related to the stocks. BWP’s settlement paved the way for a big move higher that was good enough for the top spot this week. SEP and EEP traded very well on the back of the Line 3 Replacement approval, because both SEP and EEP units will soon be exchanged for ENB shares.
On the downside, NS’s expensive and large preferred issuance was not received well, CNXM’s secondary offering hurt its unit price, and news of a potential delay on the Mountain Valley Pipeline hurt EQM and RMP.
SRLP quietly made it two weeks in a row in the top 5. On the YTD leaderboard, CEQP retained the top spot, ENBL climbed a few spots and CNXM dropped a few spots. EQM joined the bottom 5 year-to-date.
General Partners & Midstream Corporations
News drove stock in this group as well. KMI’s new growth project was further evidence KMI can find new growth projects in a post-TMEP world. NSH and EQGP were negative on the news mentioned above for their respective subsidiary MLPs. Cheniere was down on news that its largest shareholder (Carl Icahn) sold 9mm shares this week in a block trade, although Icahn and LNG fundamentals remain supportive of Cheniere. NSH and LNG were the best performers in the group last week.
On the YTD leaderboard, OKE stands very tall at the top, while NSH dropped to the bottom of the group. WMB climbed a few spots despite negative price action this week.
Canadian Midstream Corporations
ENB’s Line 3 Replacement approval by the Minnesota PUC sent ENB and ENF share shooting higher in an otherwise bland week of trading north of the border.
ENF took over the top spot in the group for the year so far, but ENB went from worst to middle of the pack on its big week. ENB is now outperforming rival Canadian behemoth TRP, which has made far fewer strategic announcements than ENB in 2018. With asset sales and simplifications announced and regulatory risk reduced, ENB may see the benefit of further rotation from here.
News of the (Midstream) World
Just last week, I was lamenting the lack of progress on natural gas pipeline takeaway solutions from the Permian, and this week we got a major Permian gas pipeline announced. But by the end of the week, there was even bigger pipeline news out of Minnesota. It turned out to be a super busy week, with two more MLPs exiting the sector (BWP and NAP), multiple capital markets transactions, two new midstream indices, and an IDR reset.
Oh, and at some point in August, we’ll have only 4 FERC commissioners, which is kind of a big deal given all the FERC uncertainty.
Capital Markets
Growth Projects / M&A
Other