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From Russia, No Love For Midstream

Hinds Howard profile picture
Hinds Howard


  • Midstream captured more downside, selling off again this week but for a different reason.
  • Last week, midstream was down alongside the rest of the stock market.
  • This time midstream was slammed by an oil price collapse after disappointment from OPEC and Russia discussions.

Midstream captured more downside, selling off again this week but for a different reason. Last week, midstream was down alongside the rest of the stock market. This week the market finished flat, utilities finished sharply higher with a big interest rate drop, but midstream sold off again. This time midstream was slammed by an oil price collapse after disappointment from OPEC and Russia discussions.

Friday's 7.1% decline for the AMZ was its worst single-day performance in more than 4 years and the 4th worst day ever for that index. The worst days ever for each of the AMZ and AMNA are below, along with returns over the following 30 days that may offer some hope to MLP investors. Large midstream corporations like Kinder Morgan (KMI), TC Energy Corp. (TRP) and Enbridge (ENB) held up much better this week and helped the broader midstream index (AMNA) outperform energy stocks by a wide margin.

Things feel almost like they are conspiring against the midstream sector, with a virus-driven global demand shock followed by another OPEC meeting failure. The cycle remains vicious for midstream, with negative news building on itself to dash the hopes of midstream investors hoping that a double-digit yield could be sustained in a sub 1.00% 10-year yield environment.

As I wrote a few weeks ago, there isn't one single thing that can come along and fix everything like the fairies you come across in Zelda. First, the negative cycle must be broken, then positives can emerge and start building on each other.

Midstream for a brief time in 2016 did build some positive momentum, with help from large equity capital raises by producers that calmed the market down and midstream stocks were able to build from there the rest of the year. It doesn't feel like the equity capital markets are

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 (66)

The market seems to confuse the upstream segment of the oil and gas industry , i.e. high-risk/high-reward exploration and production companies, with the post completion midstream segment...the midstreams, aka energy utility companies, are being sold off as if the pipelines stop transporting product because the spot price has declined...I worked in the oil field in 2008 when oil reached $10 a barrel and exploration did slow down but pipelines never missed a beat...product goes to market and how does it get there...pipelines.
@bond006 - it's crazy, my MLP closed end fund (TYG) is now 80% off the highs. I've been nibbling here and there and just keep getting my fingers singed.
PipelineDancer profile picture
You couldn't pay me to invest in a MLP closed end fund. They use leverage, and that leverage is blowing up with these declines. Rumors of some shutting down. Research and be careful.
R. Kinder just bought $5M of KMI. I think that might be a bullish signal. Or just a PR move?
$5 mil is nothing KW has been buying much more in ET.
PipelineDancer profile picture
It's nice to see any insider buying. But what I want to see is all the VPs, COO, and even executive directors dipping into their savings accounts and buying units/stock. Then I know the value is real.
If that's what you want, look at the insider buying at GEL and NGL.
Wow, my TYG down 26% today! Even though I'm pretty sure the lows are not in yet I just could not help myself but nibble on a bit more today. Buy & hold and set to DRIP for the next 20+ years.
time to buy more ET
ivanz profile picture
EPD is the best among a load of US crap. ENB, because it’s seen as a “utility in Canada,” will be more resilient, but it will drop.

No sense in adding to MLP positions tomorrow. SPY 2000. Vladimir Putin is laughing his ass off now. Maybe he can be the guest in SNL next week?
stumpy58 profile picture
Actually, you are right. This is economic war waged by the old USSR. That and cyber war. Who needs missles ? Waste of money.
PipelineDancer profile picture
The lucky bastard that got EPD for $13.88 this morning gets my nomination for best trade of the year so far.
@PipelineDancer, I missed it but it feels like we may get another op. I don't wish anyone to lose money but I'd like to buy a full position for my grands.
stumpy58 profile picture
Oil futures now at 28.5 I have oil (using t/a formula) going down to 18-20. Effect on EPD ?
frisco7 profile picture
Maybe someone can explain--please. I get it that in dire circumstances, and even more so than today, oil producing cos may come to midstream (let's use ET here as an e.g.) and say we need lower rates. There will be some small debt-laden producers who may seek chapter but others will buy the assets and perhaps also seek to renegotiate. Ok. although I don't see the leverage being all with the producers. They still must get it to a refinery or ship. Even there, where do we get from 1.8 distribution coverage to a dividend cut, speaking of ET here. And in the $30 oil scenario, wdnt capex be cut given the unprofitability of more production, meaning an increase in free cash flow? In any case, notwithstanding the <1% 10 year, where is ET's and EPD's yield threatened, even though we all certainly feel more comfortable in a non-fear environment? Wishing Hinds Howard or someone else here could explain.
us drillers will shut down capex and volumes will fall. as soon as pipes have to compete for business they will makexless money.
lsatenst1 profile picture
I don’t know ET or EPD that well but I own KMI and OKE. I think we have to look at it on a case to case basis. IN 2014-15 oil went to $25, and KMI just levered up to 5.5x buying in all their MLPS, in addition to which they have a large c02 operation that is sensitive to the price of oil as a result KMI WENT DOWN TO 12.25 still being a BBB credit. OKE did the same in 2017 levering up to buy their MLPS and go C Corp.The market is also worried about demand for NGL going forward. I think if you look at the business composition and leverage of ET and EPD, you may come up with the answer.
wmb is a nat gas shipper. They should do ok as they're not in the permian or eagle ford or bakken. mostly gas basins like marcellus.
i think. please discuss.
oil crash, big time!!!
I can't wait...bring it on. 90% cash .
Like a kid in a candy store, good for you.
Lawrence Dickman profile picture
OKE really got spanked on Friday. DOW futures are down 1100 as I type this.
Might be able to buy more OKE at $50.
lsatenst1 profile picture
I think OKE is a replay of KMI in 2014-2015. I own both, and spent hours trying to figure out why OKE was down 10% on Friday. I finally figured out that they levered up to 5x buying in their MLP in 2017, and the market is scared to death of leverage when the oil price drops. In addition I think the market is worried about NGL demand if the economy slows down. OKE is still a great company,with a great growth profile so I will buy more when I think it’s finished going down
Lawrence Dickman profile picture
Make that under $35
Check overnight oil-put your seatbelts on for 9:30 Mon AM-good luck to all...
Lenore Goldberg profile picture
Gotta start thinking about which ones can keep within debt covenants, much less hold their payouts, with WTI in the $30's (could get worse this spring . . . or next week), and US oil production dropping back to 2017 levels, in the 9 Mbpd range, until the oil markets balance enough for prices to ease and some limited growth to return, maybe. It's evident that Russia has launched shale war #2, and unlike the Saudis, who couldn't stick it out, they can, oil's not that big of a deal to them (plus they already budget with $40).

It bears looking at each of them, cutting oil flow back by a third and seeing how their leverage ratios look. Gas heavy MLP's aren't a concern of course, they only have to deal with gas in the mid $1's! Even a big diversified player like ET looks dicey all of the sudden, with a heavy emphasis on rising oil exports that suddenly are just gone . . . poof. Obviously they need to cancel every capex project on the books related to oil export. It's doubtful they will remain investment grade a year from now . . . or even next week. Obviously PAA is going to be badly hurt, they need to put the brakes on just about everything they can.

Oddly, one energy equity yield security that's 100% oil should be okay, KNOP, which runs shuttle tankers off Brazil and the North Sea. It's not like demand will be growing very fast with $40 Brent, but the only alternative to using their ships is to cap the wells. Brazil pre-salt wells have lifting costs as low as $7, so that's not happening.

Monday should be another blood bath with the reaction to the oil price drop, we'll see how bad when the futures come out in a couple hours.
KWealth profile picture
Some of this is hopefully priced in at current levels given Russia’s declaration to pump at will happened on Friday during market hours. We’re going deep red again don’t get me wrong, but it’s not on the Russia decision - it’s on SA’s price war.

Which is why this doesn’t add up for me. Russia was only cutting 300kbd - and I’m not sure they were ever in full compliance. Why didn’t SA just kick Russia out of the cartel and take business into its members’ hands?

You can’t shut down shale. It just doesn’t work. You can stunt it for awhile with low prices, we know that. But OPEC can’t live with $30-35 Brent for long. Certainly not as long as the US fracking industry (soon to be owned by the banks) can sit on DUCs waiting to be completed and drilling equipment waiting to be deployed.

Freaking Covid-19 ... we’d never have gotten to this point if not for that bug.
Aren't most big MLPs like ET fee based where regardless of volume, they get paid fixed amount?
Helloooooo. Fees can and will be renegotiated.
The shale revolution is over. Period.
Guy at Work reading SA profile picture
Only two pipes I own are ENB and TRP, I couldnt be happier owning these two the past 2 years compared to I think literally every other one. Buy the big boys with decades of experience and long term dividend growth, they have the long term capital needed to weather any bear market with the best in class assets.
Your conclusion... “investor bases still remain too fragile”

I believe your conclusion misses a very relevant insight: Buyers whom buy from panicky [retail] sellers, are the ‘strong hands’ able to weather the current storms.

For example: have you notice the ET, EPD, KMI, very recent insider buys? These professional are not fragile investors.

Included in this strong hands buyers’ group is Sam Zell. I remember his buying during 2008/2009; it was the market bottom! His timing was spot-on perfect. He made billions.

SUMMARY: this price collapse is a catalyst that moves ownership from the weak to the strong hands. 

Very Bullish for the future recovery in valuation. NRS.
What is Zell doing?
as of last week he was buying in the energy sector. can't recall who was interviewing him...
Jason Z profile picture
Sam Zell is not buying public energy companies, he's in bankruptcy courts buying the energy assets at fire sale prices. I suspect he will be very busy there for quite a while.
Insiders also buying at EPD and GEL
Hinds, With Goldman and others on CNBC now looking at oil in the 20's, even 20.what do you
think on ENB or IPL? Not selling, long term DGI, but very interested in your opinion.
Many Thanks. PS, Also hold PBA. (All for the Div.)
personally would love to add to my ENB at some crazy panic level.
You may get the chance on ENB — remember that it was under $30 in December 2018. I grabbed some in hopes of buying more lower but, alas, I caught the bottom (which almost never happens for me, only happens for other people) and sold at $38 figuring that a 1/4 position was not worth worrying about.

going to keep adding KMI under $19
A lot more pain coming tomorrow. Oil down 20% in futures.
lsatenst1 profile picture
Kinder is , no salary just dividends !
it hit $10 back in 1980s we will survive -BUY BUY BUY
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