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CBRE GLOBAL INVESTORS

CBRE Global Investors, combined with CBRE Clarion Securities and CBRE Caledon, is one of the world’s leading real asset investment managers providing real estate and infrastructure investment solutions to over 500 clients worldwide.

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CBRE Global Investors is the investment management division of CBRE Group, Inc. the world’s premier commercial real estate services and investment firm.  The company’s shares trade on the New York Stock Exchange under the symbol “CBRE.”

REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Yield High, Interest Low

Midstream stocks bounced back early in the week after two rough weeks, but then as the market rolled over later in the week, midstream and MLPs were dragged back down.  U.S. midstream corporations traded better than MLPs, helping the AMUS trade better than AMZ, a steady trend after the initial bounce off the March bottom.  Midstream finished positive overall, besting utilities and the S&P 500. 

Oil prices were very strong, but on the strongest days, midstream stocks didn’t trade well. Natural gas prices were very soft in the front month, so shoulder season oversupply is posing a near-term challenge for traders.

Midstream Beyond Petroleum?

BP’s three-day event early in the week received extensive media coverage.  Key takeaways: oil demand seen as likely peaked or peaking soon, with demand potentially never fully recovering from COVID-19 demand shock.  Gas demand remains in long-term growth mode.  Pricing action this week in each commodity ran counter to this long-term view.

The topic of renewables from last week was a popular topic among sell-side research analysts this week.  As discussed here last week, as a hedge against declining expectations for terminal value for midstream assets, there is a case to be made that well-capitalized midstream players should consider investing in renewables. 

With stock price performance being so weak over the last 5 years, it’s hard to see stocks trading worse if midstream were to strategically deploy some capital towards renewable development. One small MLP in the propane distribution business (SPH) announced a nominal investment in that direction this week and traded well.  But it seems unlikely that we see others following in the near-term.  Large natural gas pipeline heavy midstream corporations like TRP, ENB, KMI, and WMB seem best positioned to initiate discussions on green hydrogen potential or other renewable investment efforts.

SPAC Surplus, Midstream Investor Shortage

We are not building new pipelines due to over-capacity and over-regulation.  We are not making any more MLPs because of underperformance and disenfranchised investor base.  But we sure are making SPACs (Special Purpose Acquisition Companies).  There are so many SPACs being formed and preparing for IPOs, it feels very similar to the fervor around MLP IPOs back in the early 2010s.  After poor outcomes from midstream SPAC deals (like ALTM), midstream SPACs are not coming back. 

In a world of extreme enthusiasm around growth stocks, SPACs and green hydrogen, there just isn’t much room left for the market to generate enthusiasm for midstream stocks with depressed oil and natural gas prices ahead of an election and tax loss selling season.  That’s how you get nearly 11% yield for EPD and 11%+ yield for MMP.  Institutional fund outflows appear to be ongoing, and retail investors are fatigued after disappointing effort to buy midstream stocks low only to see them trade lower.

Midstream (AMNA) is down 4.2% so far in September and down 3.0% for the quarter to date.  A strong week or two could see 3Q finishing positive, which would feel like a big win after a rough September so far.  But if the broad market stumbles in 4Q, it feels like it could be very challenging for midstream to build positive momentum.  So, as has been the case all too often since 2014, midstream optimists can start to extend that hope to the January effect of a fresh year.

Winners & Losers

MLPs

EPD (-2.6% this week) just missed the bottom 5 this week, a victim of incessantly fund outflows from MLPs.  At least that’s the general assumption.  OMP was down 15% presumably on concerns about its sponsor’s imminent bankruptcy filing.  HMLP and SPH, outside the midstream MLP indexes, were strong again.  Small G&P names CNXM, NBLX and CEQP were strong.  Sponsored liquids players PSXP and BPMP were weak.

SPH and HMLP repeated near the top of the group.  NBLX went from bottom 5 to top 5 week over week, as the Colorado regulatory news selling pressure abated.  WES and DCP didn’t bounce quite as hard.  On the YTD view, not much changed other than CQP dropped out of the top 5, now gas station MLPs CAPL and SUN are in the top 5 again.

Midstream Corporations

Gas and NGL players ENLC, TRGP and OKE bounced back this week.  Cheniere caught a bid as well.  WMB was still an outperformer but lagged late in the week.  Among the losers, ETRN was at the bottom as another legal process clouded the story.  PAGP underperformed, hard out there for an oil pipeline operator amid all the ESG and renewables chatter.

Week over week, TRGP and ENLC went from bottom of the group to the top.  KMI remains somewhere in the middle each week.  On the YTD leaderboard, WMB extended its lead on the group, while Cheniere climbed a spot into the 3 hole.  TRGP was replaced in the cellar by PAGP.

Canadian Midstream

Upstream-facing midstream players Keyera and Pembina struggled relative to the pipeline and storage players in Canada this week.  Keyera provided an update on its plant outage and noted minimal financial impact despite longer outage than originally expected.  TRP outperformed ENB in the battle of the big dogs.

Keyera was worst performer for a second straight week.  IPL and GEI bounced back.  On the YTD look, the three relative winners maintained their lead on the bottom 3.

News of the (Midstream) World

Some interesting capital markets activity, including another big debt deal, a funky intercompany exchange, a funky intercompany legal issue related to a pipeline, and an investment by an MLP in a development stage renewable fuel company.  None of the news was really market moving this week.

Capital Markets

  • Cheniere Energy (LNG) announced upsizing and pricing of inaugural notes offering (press release)
    • $2.0bn of 4.625% senior notes due 2028 priced at par
    • Upsized from $1.0bn
    • Proceeds to be used to partially repay $2.695bn delayed draw term loan credit facility Cheniere entered into in June 2020
  • Western Midstream (WES) announced exchange of Occidental (OXY) note for WES units (press release)
    • Exchange improves cash flow (net $18mm improvement in CF) and removes potential overhang by eliminating 27.9mm OXY owned units
    • Implied price to take out the units was 9.33/unit, a big (20%) premium to the prior closing price, but last week WES was down 14%, which skews that a bit if it was based on VWAP over a month

M&A / Growth Projects

  • Suburban Propane (SPH) announced deal to acquire 39% stake in Oberon Fuels (press release)
    • Also announced “additional investments to support ongoing development of innovative solutions to reduce carbon emissions”
    • Oberon, based in Sand Diego, is a development stage producer of low carbon, renewable dimethyl ether transportation fuel that has been focused on R&D of a practical and affordable pathway to zero-emission transportation

Other

  • Western Midstream (WES) announced board and management transitions (press release)
    • Board of directors re-composed to add Kenneth Owen, David Schulte and Lisa Stewart
    • Board reduced in size from 11 to 8 members, and Steven Arnold, Marcia Backus, Jim Crane, Thomas Hix, Craig Stewart and David Tudor will be leaving the board
    • Michael Pearl has left his position as CFO (served since October 2019) and Michael Ure (President and CEO) will assume Pearl’s duties on interim basis
  • Equitrans Corp (ETRN) released statement regarding to its Hammerhead Pipeline (press release)
    • ETRN put out this press release because major customer and original sponsor EQT believes the pipeline to be not in-service, which would trigger an option for EQT to terminate a gathering agreement, and take title to the pipeline for a cash payment
    • EQT had hired a financial advisor to market the sale of the pipeline, and ETRN has responded by saying ETRN does not own the pipeline to sell
  • Antero Midstream (AM) CEO Paul Rady disclosed sale of 8.6mm shares as part of a plan to fund a large contribution to his alma mater, Western Colorado University (form 4)
    • Sale price was $5.40/share, $46mm