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REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Yield Inversion, Midstream Aversion

Midstream stocks were down inline with broad equities this week, after a rally Friday that almost salvaged the week.  It was a 4th straight negative week for midstream, and the MLP Index (on a price basis) now sits 11.3% lower than its high for the quarter reached in mid-July. 

Not that midstream stocks have been trading on a spread to treasuries, but the drop in the U.S. 10-year was fairly dramatic this week again, and the 10-year rate closed at 1.55%, down more than 130 basis points last year.  Utilities were the primary beneficiaries among equities. 

Another Conference in Vegas

This week I was fortunate enough to travel across the country to Las Vegas for a second time this year to attend a midstream conference.  The travel, including delayed flights on both the outgoing and return flights, plus another bad showing at the tables, left me not so eager to return any time soon. 

A few quick takes on the general sentiment around the conference:

  • Plenty of intrigue around the anonymous energy twitter accounts, most notably @mr_skilling
    • The topic came up in nearly every conversation in the hallways and even in a few meetings with management teams
    • Basically, investors would rather talk about almost anything but deteriorating stock prices and outlook
    • Sentiment among long-only investors was despondent, resigned to poor stock performance
      • Some even resorted to pestering sponsors for MNPI in a public setting
    • Management teams appear more open to taking actions that historically would not have been considered in an effort to halt alarming or just lackluster stock price performance
      • ET and PAA management teams appeared more open to full corporate conversion
      • AM management expressed willingness to take drastic measures to create more capital to use to buyback stock if prices continued lower
      • ALTM management is willing to sell the parts of one of its old processing plants for scraps to help fund growth if necessary
      • ENBL is willing to at least consider looking at cleaning up its IDRs before they ramp up
    • Those midstream companies under less stress (OKE, EPD, MMP, KMI, CEQP, PAA) seemed to be in better spirits, even though a few of them would clearly prefer a higher stock price
      • None of them seem to be in any hurry to stray from their current strategies and opportunity sets
    • Others are struggling to find their message to the market when so much of their business prospects depend on their general partners or producer customers
      • Some of these MLPs had CEOs too fresh to judge too harshly, but the retread CEOs on the other hand…

In closing, a fact I noticed for the first time this trip is that casinos don’t sell chewing gum in their stores.  The reason is that past casino guests made a mess with the gum back in the day, leaving it all over carpets and under tables and everywhere.  Basically, because people can’t behave themselves, gum is no longer sold in casinos. 

Equity capital markets at one time were extremely active, and remained pretty active in the initial stages of the MLP selloff in 2015 (remember PAA’s $1bn one and done offering?) and even into early 2017 (NS raised $579mm in an equity deal at $46.32/unit).  But, like gum in casinos, the market doesn’t like to issue common equity to MLPs any more, because the equity issued usually ends up under the table or stuck to the floor.

Winners & Losers

SHLX led all MLPs with nearly 6% gain this week.  Large market cap MLPs with small public floats (ENBL and CQP) were close to the top at more than 4% each.  On the downside, just one MLP was down double digits, while two MLPs with brand new CEOs (NBLX and SMLP) were down nearly 10% each.

ENBL and CCR went from bottom 5 last week to top 5 this week.  NBLX went from top 5 to bottom 5.  MMLP and SMLP stayed near the bottom of the group both week over week and YTD.  NGL dropped out of the top spot on the YTD leaderboard, replaced by BPL.  SHLX’s big week pushed it into the top 5.

Midstream Corporations

AM’s buyback announcement and updated investor presentation weren’t met with much enthusiasm early in the week, but when natural gas prices started to move higher Thursday, AM bounced hard and finished the week with the best performance in the group.  Just a few other names among midstream corporations were positive this week, including ENLC, which likewise rallied late in the week.  On the downside, TGE was again weak on no company-specific news.

OKE repeated among the winners week over week, while AM, ENLC and SEMG bounced back from double digit drawdowns last week.  On the YTD leaderboard, LNG joined the top 5, but is up just 1.3% for the year, a reflection of how far others that were in the top 5 at 20%+ returns have fallen.

Canadian Midstream

The biggest Canadian names performed the best this week, in order of size for the top 4 best performers.  ENB has been trading better in recent weeks despite ongoing, but well known, regulatory uncertainty.

IPL’s speculative M&A bounce from last week did not see follow through this week.  On the YTD leaderboard, TRP regained the top spot when IPL and Keyera stumbled this week.  Each of the top 5 is up 25%+ for the year overall.  As you would expect, Canada has held up better than U.S. MLPs and midstream, given stickier investor base and more conservative business models.

News of the (Midstream) World

The end of summer slowdown for news is upon us.  OKE priced a bond deal early in the week, and explained at the conference that they were originally planning to issue these notes in December, but took the opportunity now to “go ahead and get it done”.  After 3 CEO changes last week, there was just one this week!  In project news, no new capital blessing announcements, but two fresh crude oil pipelines (Cactus II and EPIC) and a processing plant (Bear Den) went into service.

Capital Markets

  • ONEOK (OKE) priced public offering of $2bn of senior notes (press release),including:
    • $500mm of 2.75% notes due 2024 at 99.807% of par
    • $750mm of 3.40% notes due 2029 at 99.644% of par
    • $750mm of 4.45% notes due 2049 at 99.505% of par
  • Antero Midstream (AM) authorized a $300mm share repurchase program through June 30, 2021 (filing)

Growth Projects / M&A

  • Kinder Morgan (KMI) announced over $170mm of capex to enhance capabilities at Houston Ship Channel facilities (press release)
    • Projects expected to be completed by in the second half of 2020, supported by a long-term agreement with a major refiner and an investment grade midstream company
  • Martin Midstream (MMLP) announced the sale of its East Texas Pipeline to an undisclosed buyer with net proceeds of $17.5mm (press release)
    • Assets had de minimis EBITDA associated with them

Other

  • Noble Midstream (NBLX) CEO and COO, Terry Gerhart and John Nicholson, have resigned (filing)
    • Filing stated both resigned amicably and not because of any disagreement with the GP or LP relating to any operations
    • Brent Smolik has been appointed CEO of the GP