Seeking Alpha

Midstream Checked, Market Unbalanced

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Includes: ALTM, AM, APU, CEQP, ENB, ENLC, EQM, KMI, LNG, OKE, RTLR, SHLX, SUN, TELL, TGE, TGP, TRP, USAC
by: Hinds Howard
Summary

Broad market fear appears to be joining the energy sector antipathy and midstream apathy we've seen all summer.

Midstream stocks should prove more durable going forward, especially considering more reasonable starting valuations today.

The median U.S. midstream corporations' return of -3.4% was much worse than the MLP or midstream index returns, likely due to smaller names in the group performing worse.

Midstream stocks declined for a 6th straight week, this time joined by a pretty scary broad stock market decline on Friday. Broad market fear appears to be joining the energy sector antipathy and midstream apathy we've seen all summer. Only utilities escaped the week unscathed, in the ongoing flight to safety that has driven outperformance for treasuries and utilities all year.

The MLP Index has fallen 12.8% since peaking 6 weeks ago and is just 1% away from being flat on a price basis for the year. The AMZ at -8.1% return so far in August is on pace for its worst month since February 2018. Ethane and propane were higher this week, diverging from oil and natural gas, indicating some improvement in the oversupply situation on the U.S. Gulf Coast.

Rightsizing the Universe: 5 Years In

The 5-year anniversary of the peak of the MLP Index is coming up at the end of August. I've collected thoughts on what's happened since and some key takeaways from the changes the sector has undergone since that date.

There are several fun charts and lots of other details, so I hope you go read and enjoy. But, to summarize:

  • No surprise: Performance of midstream has been bad, MLP performance has been worse
  • 80+ tickers have been removed from the sector, "right-sizing" process has come a long way in 5 years
  • Financial health of remaining stocks much improved
  • Midstream stocks should prove more durable going forward, especially considering more reasonable starting valuations today
  • Standalone MLP/Midstream allocations should be giving way to broader global infrastructure, where the Midstream sector can be part of a diversified infrastructure exposure and dampen an investor's exposure to Midstream's volatility and oil correlation

Winners & Losers

Crestwood Equity Partners (NYSE:CEQP) was notable as the best performing midstream MLP this week after reiterating positive commentary at the conference last week and receiving some sell-side support this week. Two shipping MLPs and one coal MLP were in the top 5 this week, all probably helped by not being in the major MLP Indexes.

Shell Midstream Partners (NYSE:SHLX) went from first last week to near the bottom this week on no news. SMLP repeated in the bottom 5, and on the YTD leaderboard, SMLP crossed over the -50% threshold. EQM Midstream Partners (NYSE:EQM) is now the third worst performer at -25%. On the positive side of the ledger, USA Compression Partners (NYSE:USAC) and Teekay LNG Partners (NYSE:TGP) rejoined the top 5, replacing SHLX and AmeriGas Partners (NYSE:APU).

Midstream Corporations

The median U.S. midstream corporations' return of -3.4% was much worse than the MLP or midstream index returns, likely due to smaller names in the group performing worse. Not a single one in the group traded up this week, but some did much better than others. Rattler Midstream (NASDAQ:RTLR) led the group, and the remainder of the top 5 skewed towards contracted natural gas infrastructure companies like Williams Companies (NYSE:WMB), Cheniere Energy (NYSEMKT:LNG), and Kinder Morgan (NYSE:KMI).

Altus Midstream (NASDAQ:ALTM) dropped 8% Friday to close the week down 16% for the week. SemGroup (NYSE:SEMG) was positive for the week before Friday's 9.5% decline. The three simplified former GP holding companies that the market has turned its back on (Tallgrass Energy (NYSE:TGE), EnLink Midstream (NYSE:ENLC), Antero Midstream (NYSE:AM)) round out the bottom 5.

ONEOK (NYSE:OKE) repeated in the top 5 this week. TGE repeated in the bottom 5. On the YTD leaderboard, KMI maintained its slim lead over OKE, while Cheniere turned negative YTD. ALTM broke through -70%, more than twice as bad as the next worst performing stock. Others in the bottom 5 are tightly bunched around -30%.

Although not pictured in the charts above, early-stage LNG development company Tellurian (NASDAQ:TELL) had a wild week and a half. After bottoming at $5.54/share on 8/14, it appears there was an epic short squeeze sparked by positive commentary at the conference that sent the share price up 66% to $9.19/share over 6 trading days, before dropping 18% Friday.

Canadian Midstream

The big M&A announcement of the week certainly skews the Canadian midstream chart. KML obviously led the way, TC Energy (NYSE:TRP) was the only other name to be positive in this group. But all of the Canadian midstream stocks outperformed the median U.S. midstream corporation return, which is what we've come to expect from Canadian midstream, which tends to be more defensive than U.S. midstream.

Enbridge (NYSE:ENB) went from first last week to worst this week. KML's huge week moved its YTD return into positive territory, but it is still the worst performer in the group for the year.

News of the (Midstream) World

It seems like it was all Canada news this week. The KML experiment announced its conclusion by selling out to Pembina, which continues to grow and absorb smaller players. Also, Canada related, Keystone XL received affirmation of its planned route in Nebraska. Finally, the Canadian province of Alberta extended its production curtailment for another year.

Capital Markets

  • Sunoco LP (NYSE:SUN) filed shelf registration form S-3 to register up to $300mm worth of equity securities for sale (filing).

Growth Projects/M&A

  • Pembina (PPL-CA) announced acquisition of all of the outstanding common equity of Kinder Morgan Canada (KML-CA), including the 70% majority voting interest held by Kinder Morgan (press release)
    • KML shareholders, including KMI, will receive .3068 shares of PPL for each KML share, implying a C$15.12 takeout price, or a 38% premium based on prior day closing
    • KMI will receive 25mm PPL shares, slightly less than 5% of PPL common equity, which it plans to sell
    • In addition to the KML sale, PPL will purchase the US portion of the Cochin Pipeline from KMI for $1.546bn, approximately 13x 2019 EBITDA
    • Cochin has capacity of 110,000 bpd and spans from Chicago, IL to Fort Saskatchewan, Alberta
    • KMI will use proceeds to reduce debt and to invest in projects and/or buyback shares
    • The closing of both transactions cross-conditioned upon each other and are expected to close in late 2019 or in Q1 2020
  • The Nebraska Supreme Court affirmed the November 2017 decision by the Nebraska PUC that approved the Keystone XL Pipeline route through the state (press release)
    • TC Energy has been developing the project for more than a decade
    • The ruling removes one challenge to the project, but Keystone continues to be challenged in Montana, and TRP missed its chance to start any major construction this year and would be a hot-button issue if a new administration took over the executive branch of the U.S. government in the next election
    • TRP has yet to make a final investment decision (FID) on the pipeline

Other

  • In Alberta, the provincial government announced extension of the mandatory oil production curtailments through year end 2020, due to ongoing delays in pipeline development (Reuters)
    • Some had hoped for a carve-out of the concession for more rail volumes, but such a deal was not struck
  • No CEO changes across midstream this week, after several in the last few weeks

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