Midstream In Bloom

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Includes: AM, APU, BPMP, CNXM, CXO, ENB, ENLC, ET, FANG, LNG, NEXT, PAGP, PBA, RTLR, SEMG, SMLP, SRLP, TELL, TOO, TRP, UGI, WLKP, WPX
by: Hinds Howard
Summary

After a few flattish weeks, midstream grinded higher this week, finishing up 1.2%.

Midstream lagged oil prices, energy stocks and the S&P 500.

The U.S. 10-year treasury rate bounced back up to 2.50%, and utilities underperformed.

After a few flattish weeks, midstream grinded higher this week, finishing up 1.2%. Midstream lagged oil prices, energy stocks and the S&P 500. The U.S. 10-year treasury rate bounced back up to 2.50%, and utilities underperformed.

This week's gains across the board pushed the S&P 500 to its highest point since October, WTI oil price to its highest point since November, the Alerian MLP Total Return Index to its highest point since October, and the Alerian Midstream Energy Total Return Index to its highest point since early August. Things generally feel pretty good, which as noted in last week's post, is on average how things tend to feel this time of year, on average.

Capital Allocation

For the last few quarters, the topic of buybacks for midstream companies and MLPs has been brought up in public forums. It all seemed very theoretical in most cases, because of leverage reduction priorities and large capex backlogs, but it was exciting to ponder now that most MLPs no longer have IDRs in the way to make buybacks impractical.

One of the few exceptions was Plains All American (NYSE:PAA), whose repeated distribution cuts and successful asset sale program set it up to have high enough free cash flow to seriously contemplate buy-backs this year. This week, PAA raised its distribution 20%, by around $175mm annually, and was mum on buybacks. PAA isn't quite as special in terms of its financial flexibility as it was a week ago.

Nevermind

This Friday marked the 25th anniversary of Nirvana lead singer Kurt Cobain's death. His last concert in Houston was 5 months earlier, on December 6, 1993, at the Astro Arena (now the NRG Arena). It was the In Utero tour, and the Breeders were the opening act for Nirvana.

I know all of this because of the Internet, but also because I was there. It was my first concert, tagging along with my older brother and his friends. I don't remember much about that night, but I definitely remember Nirvana's music and the music videos. I probably bought the Nevermind CD at the Sound Warehouse off I-10 and Echo Lane near Memorial High School, in what is now a Ross Dress for Less store, apparently.

I tried to tie this bit of nostalgia back to midstream by connecting it to Houston, but there may also be an analogy in there somewhere. Kurt Cobain died at 27 years old, while Nirvana drummer Dave Grohl is still rocking on at age 50. Similarly, certain high growth MLPs or aggressively-managed MLPs in the past attracted enthusiasm in the market before flaming out, while others have been managed more conservatively and created sustained value for investors.

Around the time of that concert, the Northern Border Partners (NBP) IPO had just happened (in September 1993). NBP would eventually become ONEOK Partners, which is now ONEOK, Inc. (NYSE:OKE). Its life as an MLP lasted 24 years, longer than most MLPs, but it has re-invented itself as a midstream corporation and is rocking on, alongside many others this year so far.

Winners & Losers

TOO led all MLPs this week, helped by a new financing announcement. APU gained 14.5% after its buyout was announced. No other news among the winners or losers this week.

No repeats in the top or bottom 5 week over week. On the YTD leaderboard, APU climbed all the way to the second spot from out of the top 5 last week. SRLP dropped out of the top 5.

On the YTD bottom 5, it should be no surprise that 3 of the 5 worst-performing MLPs have IDRs in their structure (CNXM, WLKP, BPMP), and a 4th one (NYSE:SMLP) had an egregiously dilutive IDR elimination transaction this year.

Midstream Corporations

U.S. midstream corporations underperformed MLPs and Canada this week. PAGP announced a 20% distribution increase and lower long-term leverage targets, which may have helped it outperform this week. There was no news elsewhere in this group. TRGP was weak and market chatter was that very low natural gas prices at Waha and Houston Ship Channel's temporary shutdown have investors worried about results.

Many of last week's best performers were in the bottom 5 this week. AM was an outlier with a repeat in the top 5, and LNG was a repeat in the bottom 5. On the YTD leaderboard, ENLC remains in the overall lead and AM returned to the top 5, displacing PAGP. SEMG climbed out of the bottom 5 after big gains this week.

Canadian Midstream

Big-caps outperformed in a strong week for Canadian midstream overall. The credit downgrade for TRP at Moody's was not a problem for the equity price. ENB and Pembina (NYSE:PBA) were a close second. GEI's continued progress on jettisoning non-core assets probably contributed to relatively strong performance.

Year-to-date, TransCanada is now up 30%+ in USD terms to lead the group. Enbridge has fallen behind, but is still up 20%+.

News of the (Midstream) World

Some IPO progress happened this week, as RTLR appears closer to launching its IPO, which would be the first since late 2017. Beyond that it was more of the same. More IDR/simplification progress with the APU deal, which was positive for the stock this week, but will result in some big tax bills this time next year. More big private equity check written for midstream assets. More indications of that second wave LNG commercialization.

Capital Markets

  • Rattler Midstream (RTLR) updated registration statement for IPO (filing)
    • RTLR has no IDRs, is structured as a partnership, but will issue a 1099 and be treated as a corporation for tax purposes
    • RTLR will own an unspecified (at this point) interest in Rattler LLC, which expects to generate $258mm in EBITDA over the next 12 months ending 3/31/19
    • Sponsor Diamondback (NASDAQ:FANG) will own the remaining interest in Rattler LLC
    • RTLR owns 746 miles of crude oil gathering pipelines, natural gas gathering pipelines and a fully integrated water system on acreage that overlays Diamondback seven Midland and Delaware Basin development areas
    • RTLR also owns a 10% interest in each of the EPIC and Gay Oak crude oil pipeline projects
  • EnLink Midstream priced $500mm of its 5.375% senior notes due 2029 at par (press release)
  • NGL Energy (NYSE:NGL) priced private offering of $450mm of 7.50% senior notes due 2026 at par (press release)
  • TransCanada was downgraded from A3 to Baa1 at Moody's
  • Teekay Offshore announced new $414mm debt facility for four shuttle tanker newbuilds (press release)

Growth Projects/M&A

  • Amerigas (NYSE:APU) announced merger agreement with general partner UGI Corporation (NYSE:UGI) whereby remaining APU publicly-held units (69.2mm total) will be purchased by UGI in exchange for stock and cash consideration (press release)
    • UGI currently owns 26% of APU units
    • APU unitholders will receive 0.50 shares of UGI stock plus $7.63 in cash for each APU unit held
    • Implied takeout price was 13.5% above prior day's closing price, but was 4% below the price at the time the strategic review was announced in December 2018
    • APU (IPO in 1996) is one of the oldest MLPs still trading, and at one point in 1996 represented 18% of the weight of the Alerian MLP Index
    • The transaction results in an 80%+ decline in income for APU investors
    • The transaction will be taxable for APU owners, many of whom are likely retail investors with low or no tax basis
  • Stonepeak Infrastructure acquired Oryx from affiliates of Quantum Energy Partners, Post Oak Energy, Concho Resources (NYSE:CXO), WPX Energy (NYSE:WPX), and other investors for $3.6bn (press release)
    • Oryx is the largest privately-held midstream crude operator in the Permian
    • Oryx systems includes 2.1mm barrels of storage and 1,200 miles of in-service and under-construction pipeline in Texas and New Mexico
    • Total Delaware Basin transportation capacity will ultimately exceed 900,000 bpd upon completion of the remaining part of the system under construction
  • NextDecade Corp. (NASDAQ:NEXT) announced a 20-year sale and purchase agreement with Shell (NYSE:RDS.A) (NYSE:RDS.B) for supply of 2 Mtpa of LNG from its Rio Grande LNG project in Brownsville, Texas (press release)
    • 75% of the volumes will be linked to Brent oil prices, apparently it is the first Brent-linked LNG contract
    • The remaining 25% will be indexed to domestic U.S. natural gas indices, including Henry Hub
  • Tellurian (NASDAQ:TELL) and Total (NYSE:TOT) signed a Heads of Agreement for $500mm equity investment in Driftwood LNG export terminal, 2.5 Mtpa offtake, and a common stock purchase agreement (press release)
    • Total will purchase 1 Mtpa from Driftwood and will enter into a sales and purchase agreement for a further 1.5 Mtpa of LNG from TELL's Marketing LNG offtake volumes from Driftwood
    • Total will purchase 19.87mm shares of TELL for $200mm ($10/share) subject to the FID of Driftwood among other conditions
    • FID on Driftwood slipped again from June 2019 to 2019
  • Gibson Energy (GEI-CA) announced sale of Canadian truck business for $100mm (press release)

Other

  • Energy Transfer (NYSE:ET) announced it is expanding its presence in China by opening office in Beijing, hopes to get more involved in meeting growing demand for ethane and LNG from China (press release)

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.