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Midstream Steel Down

Mar. 04, 2018 7:56 PM ETSXCP, NRP, PSX, SHLX, OMP, MMLP, APLP, NBLX, HEP, NS15 Comments
Hinds Howard profile picture
Hinds Howard

It was another rough week for Midstream overall, but MLPs held up better than broad midstream for a second straight week, and they also outperformed utilities.

This week’s sell-off seemed more like guilt from association with energy than anything specifically related to midstream. 4Q results released over the last month indicate improving fundamentals and a need for more infrastructure (including some outside the Permian Basin for a change). But with weakness across the stock market, lower oil prices and the potential for a new headwind to project returns (albeit modest) in steel tariffs, it was hard for midstream to gain any traction.

Business Model Behavior

The path forward is continued execution this quarter towards the Midstream 2.0 model of lower leverage, lower payout ratios and no IDRs that enables some self-funding that I have been espousing here for 2+ years. Midstream can get there with cash flow growth, asset sales, capital discipline and more simplification deals. New promises have been made, and as those promises are kept, interest in midstream can return.

In the meantime, the midstream companies that already embody the Midstream 2.0 model (and their investors) are getting tired of being whipsawed around by negative sentiment surrounding the bad actors of the sector. With the glut of midstream stocks relative to demand, and with passive vehicles seeing big swings in fund flows, there is little differentiation among good and bad MLPs at the moment.

If such trading dynamics continue, expect the shift away from the MLP wrapper as the preferred midstream vehicle to continue. In light of these dynamics, the potential for an EPD corporate conversion should be a hot topic at EPD’s analyst day this week.

Timing is Everything in a Snow Storm

I’ve written about snow here in the past. The first time was when I lived

This article was written by

Hinds Howard profile picture
I serve as Portfolio Manager on the Listed Infrastructure Team at CBRE Clarion Securities, a global asset management firm based in Radnor, PA. My primary focus is on investing in Midstream companies, including Master Limited Partnerships (MLPs), as well as transportation companies (rails, airports) for larger infrastructure investment team.

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Comments (15)

BMW7 profile picture
Sell puts . BPL , EPD , SEP ... no brainer . Accumulate . Red light special !
What kind of implied volatility do those options trade with -- whenever I look it seems like maybe 1.5x the market rate, which doesn't seem like enough to me? Just curious.
Anyone have/had OKS? Any clue of how this merger will be taxed?
R.Fitz the OKS K-1 came out last Friday. The actual impact to the former unitholders varies based upon your holding period and basis. For us 16.6% of our sales price was capital gains and 13.3%, net or prior year passive losses, was ordinary income.
Thanks -- may I ask - do you owe any taxes? I just send mine to
Charles Schwab and let them deal with it -- am hold lots of cash to cover -- looking at 10 years holding it.
R.Fitz, of course I owed tax on the transaction, I had a capital gain and net ordinary income.
I must ask, why does Schwab prepare your tax return?
Courage & Conviction Investing profile picture
What Boston snow storm? In February /March 2018....?
BeaBaggage profile picture
When the EFTs and passive funds disgorge no matter the good news, you can't fight the tape; at least sometimes that provides great opportunities for long term investors in individual issues.

Was wondering why BPL was so weak, I see now it has gone the private placement route, a favorite capital raising strategy of Canadian issues.. looks like the sector wants to make at least a double bottom from late 2017 or maybe? test Feb'16 lows. Bea
100% agree Bea.

With this author, it is always bad sentiment to blame. Never the fact that most of these names trade at EV/EBITDA of 12-14x, often have customer or supplier concentration in the extreme, ridiculously overvalued sponsor rights, etc.

His moaning about sentiment reminds me alot of 2001 when people stood around and wondered when Cisco was going back to $80.

The 2013-15 bubble was a bubble and valuations have returned to their long run normal for this sector.
BeaBaggage profile picture
good points but I believe a lot of this has shaken out with still a small amount of downside risks.. like Cisco they could trade sideways for years. I too worry about customer/supplier concentration risks.. but overall even flat distributions will provide a decent return and I own via CEF's..but not adding now.

if you remember 2001 then you remember these companies pre "MLP" days were utility like back then w low betas pre-Marcellus/shale days..good safe stocks and yields.. seems like the market is telling them to go back to that model by forcing financial discipline on them

the next phase will probably be consolidation, there are far too many companies and that will be one way to get exp down (G&A, maybe also int. costs.)

great financing is still available as witnessed by Williams getting long term money for under 5% above..

as far as Hind's reviews, I think they are a great resource for us to get info in one place or from his CBRE website, he has a great background in the biz.. Bea http://bit.ly/2FVTmW3
My non consensus viewpoint is that generally transport capacity is expanding faster than demand and that transportation (but not processing, and not everywhere) pricing is going to get weaker over time. But the debt remains, forcing equity values down. I also believe base interest rates and credit spreads are about as low as they are going to get over the medium term.

Revalue most of these businesses to 7-10x EBITDA and the equity values need to fall by 50% to make it work given the turns of debt on most.

Good trading sector though for sure and I have long positions in a few, generally those without debt and/or strong sponsors that can't afford to really let the shareholders take it in the shorts.

And I agree with you about the value of the Hinds weekly -- I never miss it -- just get tired of the "sentiment" stuff. Stick to the facts please.
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