Takeout Bid Stops Midstream Bleeding

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Includes: ALTM, AM, BX, DKL, ENB, EPD, GLP, KMI, MMLP, MMP, NBLX, NGL, NRP, OKE, PAA, PBFX, PPL, SMLP, TCP, TGE, TRGP, TRP, USAC, WES, WLKP, WMB
by: Hinds Howard
Summary

Midstream broke out of its 6-week slump this week, helped by a private equity bid lobbed in Tuesday night.

At -5.5% return, this August was the worst month of the year, worst month since December of last year (-9.4%).

NGL's buyback announcement Friday added to already strong stock action this week to lead all MLPs.

Midstream broke out of its 6-week slump this week, helped by a private equity bid lobbed in Tuesday night, but also helped by risk-on broad market action and rebounding commodity prices.

Even with a 30% gain from a 3.5% weight in the AMZ, the AMNA with less than 1% weight in that same name, outperformed this week, on broad-based gains across midstream corporations and Canadian midstream stocks.

Oil prices rallied this week on a very strong weekly inventory report. Natural gas and NGL prices were notably positive as well. Ethane prices rose 13% this week to cap a furious 117% rally off its multi-decade low price at the end of July. Still a long way to go to get back to Fall 2018 levels, but a much-needed improvement and a sign that the glut of ethane along the Gulf Coast is working its way down.

IEnova and TRP reacted positively to the news of Mexico agreement that seemed to skew favorably to pipeline operators rather than government. There was also some movement on MVP and Constitution projects from FERC. When adding in positive outcome for Keystone XL earlier this month, it feels like there's been a modest break in the regulatory clouds recently. Going into an election year, I'd be surprised if that break lasts very long before fresh environmental opposition emerges.

Least-Favored-Nations Bid for TallGrass

On Tuesday night, TGE caught a bid from its new general partner, Blackstone (NYSE:BX) . A lot has been said about this news in the media (see Bloomberg articles here and here), and across Twitter. But I'll touch on a few thoughts here.

  • My first reaction was that the premium was huge, but the bid was actually at a discount to the price of TGE a month ago and a big discount to the price in May when Blackstone stopped buying units in the open market.
    • It felt like a defensive move by a private equity firm not comfortable with daily marking to market in a stock that was down 40% in less than 3 months.
  • My second reaction was that it would put a floor on several other stocks that have meaningful private equity ownership or relationships combined with poor stock price performance.
    • ENLC, SEMG, SMLP, TRGP came to mind as likely beneficiaries of the bid, maybe also AM and EQM/ETRN more based on weak price action.
  • Indecent Proposal? Third and subsequent reactions were related to the side letter between Blackstone and TGE management that entitle management teams to a $26.25/unit price in the event the rest of TGE is bought out (read the letter here)
    • The side letter drew the ire of investors and validated some of the corporate governance concerns we've voiced related to partnerships vs. corporations.
    • The story isn't over on this side letter "issue," and it could certainly be resolved with some proactive special committee and management team actions (i.e., higher bid or lower pricing for management shares in the ultimate agreement).

Index Considerations:

  • Pending buyouts BPL and TGE (even though it is just a bid at this point) combine to represent around 10% of the MLP Index. Until these deals close, that's 10% of the index with prices that will remain relatively static, basically 10% cash drag on performance of the rest of the MLPs in the benchmark.
  • Since the BPL buyout announcement in May, its lack of volatility has helped it outperform the AMZ by more than 600 basis points since then, and AMZ returns would have been lower without BPL's cash drag.
    • These challenges are common across all indexes, but in recent years, as highlighted in my 5 years post last week (read here), the tickers involved have changed at a much quicker rate than in years past.
  • BPL and TGE buyouts may represent the final nail in the coffin for this index's relevance. After these two names leave the index, we will likely have 6 MLPs with 10% capped weights (EPD, ET, MMP, PAA, MPLX, and WES). The next largest names would be EQM, PSXP and DCP. Not a fair representation of the midstream opportunity set.

Status Update: Worst Month of 2019

At -5.5% return, this August was the worst month of the year, worst month since December of last year (-9.4%). It was the worst return in the month of August for the AMZ since 2007 (-5.8%). Looking forward, September has been hit or miss over the years, with 13 positive and 10 negative years, with a median +1% return.

For the quarter, MLPs are down 5.7%. If the quarter ended at that same level, it would be a bad quarter, but not nearly as bad as 4Q 2018 (-17.3%) or 1Q 2018 (-11.6%) or even 2Q 2017 (-6.4%). On the other hand, for the quarter to end flat it would take at least the best September return since 2000 (+6.1% in 2010) to get back to flat.

AMNA Status Update: Separation Continues

Broader midstream held up far better than the MLP Index in August and so far this quarter is down 4.0%, also much better than MLPs by themselves. This is due to strong returns in Canada and for a few of the large-cap midstream names.

Winners & Losers

NGL's buyback announcement Friday added to already strong stock action this week to lead all MLPs. SMLP traded up after the TGE bid as an MLP with a private equity sponsor and a very low stock price, earning it a reprieve after a terrible week last week. MMLP did not get the treatment of other midstream stocks with private equity involvement, underperforming the group.

MMLP repeated in the bottom 5, while SMLP went from bottom to top 5. On the YTD leaderboard, NGL retook the lead and USAC climbed a few spots. Also notable, CEQP rejoined the top 5, replacing TGP. MMLP and SMLP are still far and away the worst-performing MLPs.

Midstream Corporations

TGE went from free-falling in recent weeks to oscillating around its current bid price, finishing +30% on the week and still down 13.7% for the year. TRGP and ENLC bounced hard after the TGE news in what may have been possible readthroughs into other beaten-down stocks with private equity relationships. AM was the only negative stock in the group, trading down early in the week after a credit downgrade by S&P from BB+ to BB with negative outlook.

OKE and TRGP repeated in the top 5 week-over-week. ALTM and AM were the only repeats in the bottom 5. On the YTD leaderboard, OKE overtook KMI as the overall leader in returns this year at 37%. WMB returned to double digit YTD returns, and TRGP returned to positive YTD returns and to the top 5.

Canadian Midstream

TC Energy (TRP) was far and away the best performer this week and extended its YTD lead on the group on now news. Enbridge was second place and Pembina was third in a week led by large cap names. It was a bit odd that in a week when a U.S. name made waves with a buyout bid that Inter Pipeline, rumored to be the target of a takeout bid in recent weeks, was the worst-performing stock in the group.

ENB and PPL went from bottom to close to the top week over week. On the YTD leaderboard, no changes to the order of the list, and all of the stocks have done pretty well.

TRP may have traded well this week on positive outcome from negotiations with the Mexican government related to certain pipeline contracts, but unlike the Mexican midstream company IEnova, TRP didn't seem to trade down when that contract uncertainty in the months ahead of this positive outcome.

News of the (Midstream) World

Capital Markets

  • NGL Energy (NYSE:NGL) announced $150mm unit repurchase program through 9/30/21 (press release)

Growth Projects / M&A

  • Tallgrass Energy (TGE) received a non-binding proposal from Blackstone Infrastructure Partners, its GP, to take TGE private at $19.50/share, or a 36% premium from prior day close (press release)
    • Blackstone currently holds a 44.2% economic interest in TGE after its initial purchase on January 31 at $23.83/share.
    • According to Schedule 13D filings from March, management side letters grant TGE management a $26.25/share takeout price if TGE goes private.
  • Saddlehorn Pipeline, a JV between Magellan Midstream (NYSE:MMP), Plains All American (NYSE:PAA), and Western Midstream (NYSE:WES), announced an expansion to increase crude oil capacity to 290,000 bpd from 190,000 bpd following a successful open season (press release)
    • Noble Midstream (NYSE:NBLX), through its affiliate Black Diamond Gathering, has an option to buy up to a 20% ownership in Saddlehorn, with MMP and PAA each selling up to a 10% interest
  • Enterprise Products (NYSE:EPD) announced a binding open season for the Appalachia-to-Texas (ATEX) ethane pipeline (press release)

Other

  • Enbridge (NYSE:ENB) announced agreement with shippers to place Canadian portion of its Line 3 Replacement Pipeline (press release)
  • Kinder Morgan (KMI) chairman, Richard Kinder, purchased 700,00 KMI shares, roughly $13.9mm, in two separate transactions disclosed this week (filing, filing)

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