Midstream Paper Jam

Summary

• After an all-time good week across the sector last week, Midstream stocks gave it all back this week.
• Most of the damage came on Thursday, when the broad equity market dropped 6%.
• Midstream stocks sold off even more Thursday, dragged down by an 8% decline in oil prices and $832mm in new equity from a large, unexpected marketed equity offering by OKE.

After an all-time good week across the sector last week, Midstream stocks gave it all back this week. Most of the damage came on Thursday, when the broad equity market dropped 6%. Midstream stocks sold off even more Thursday, dragged down by an 8% decline in oil prices and $832mm in new equity from a large, unexpected marketed equity offering by OKE. Awful timing for that offering left the sector scrambling to digest the new shares.

This week, we published an off-cycle post once again highlighting listed infrastructure as an alternative to standalone, very volatile midstream exposure. The post was called "Infrastructure: Another Midstream Exit Opportunity".

Paper Jam

The Fed printing money to support the locked down economy has clearly been a driver of equity performance across the stock market in recent months. The Fed chairman's commentary Wednesday afternoon was cited as one of the reasons for the big sell-off Thursday as he flagged that the pandemic could result in permanent economic damage and extended period of unemployment.

So, this week was a paper jam for the Fed printing press. It was a paper jam of new midstream paper that overwhelmed the midstream sector.

What Provoked ONEOK?

The equity offering by OKE this week was the biggest equity issuance since its $1.2bn overnight offering in January 2018. It was the biggest equity offering with a one-day marketing effort in more than five years. It was hard to understand what the rationale could be for OKE to willfully tank its stock price when it appeared that ratings agencies were willing to give the company some time to fix its high leverage.

OKE had rallied 222% from March 18 through Monday's close, so it could be seen as simply an opportunistic issuance 115% higher than its March low (even if it priced 33% lower than Monday's close). Another way to look at the offering is that management believes $32/share is a good price to sell equity because it is cautious on how fundamentals progress from here. But if that were the case, it seems like a dividend cut would have been more reasonable.

Whatever the reason (or combination of reasons), this equity does reduce leverage immediately. Also, the terrible stock price reaction should deter others from attempting a straight marketed equity offering. But midstream investors are looking around to see if others will try to come to market next.

The 10 largest U.S. midstream companies other than OKE are: KMI, WMB, EPD, MMP, ET, PAA, MPLX, TRGP, LNG, and PSXP.

Updated Worst Days Ever List

Thursday, we added another worst day to the top 10 list for MLPs and the AMNA. Now, 7 of the worst 10 days ever have happened this year, and the year is not half over. Most of the other days on the list have been good, short-term buying opportunities, with next 30-day returns positive except for one.

Updated Worst Weeks Ever

Last week, AMZ had its 4th best week ever, and this week AMZ had its 5th worst week this week. AMNA went from 3rd best week last week to 3rd worst week.

The next four weeks had been a bit more mixed than the above charts, but historically the sector has rebounded over the subsequent four weeks, except earlier this year when a 12% move down for AMZ was followed by a 50% decline in the next four weeks.

Winners & Losers

MLPs

Three MLPs were positive this week, including ARLP at the top. The losing side of the ledger was dominated by some of the best performing G&P and liquids focused MLPs off the bottom. These names crapped out this week with falling oil prices and risk-off trading.

ENBL, NGL, GEL and PBFX were all in the top 5 last week and were bottom 5 this week. EVA and SRLP were the biggest losers last week and were among the biggest winners this week. On the YTD leaderboard, SRLP and EVA moved up to the top 2 spots. At the other end of the scale, CEQP rejoined the bottom 5, replacing GLP. ARLP edged out of the cellar, replaced by NBLX at -61.2%.

Midstream Corporations

HESM was the best-performing non K-1 issuing midstream company this week at just -5%. Other gas focused names like AM, KMI and LNG were also outperformers. OKE was far and away the worst performing corporation at -25%. Other volatile upstream-oriented players like TRGP, PAGP and ENLC were also among the losers.

HESM was the worst performer last week and best performer this week, moving counter to the market of late. ENLC, TRGP and OKE went from top 5 last week to bottom 5 this week. AM and RTLR repeated as outperformers. ETRN repeated as just slightly worst performer than average.

On the YTD leaderboard, HESM is the best performer so far, replacing WMB at the top. On the bottom 5, OKE retook the bottom spot at -52.8%.

Canadian Midstream

Canada was less volatile than the U.S. this week, like most weeks. The biggest, most defensive names ENB, TRP outperformed. More upstream-oriented companies Pembina (PBA), Keyera (OTCPK:KEYUF) and Inter were at the bottom.

Performance this week was basically the mirror image of last week, when higher beta names outperformed, and the big boys underperformed. In typically boring Canadian fashion, the YTD leaderboard rankings match exactly the weekly rankings, except with TRP ahead of ENB.

News of the (Midstream) World

OKE's equity deal was a surprise. While the equity markets appear slightly open (for a price), the debt capital markets remain wide open and supportive of midstream companies and MLPs, as evidenced by PAA.

Capital Markets

• ONEOK priced offering of 26mm shares at $32/share, raising $832mm in gross proceeds (press release)

  • This was a one-day bookbuild, and the transaction priced at a 9.4% discount to the closing price for an overall 23.7% decline from unaffected price

  • Not encouraging for other management teams considering cashing in on recent price gains

• Plains All American priced $750mm of 3.80% senior notes due 2030 at 99.794% of par to yield 3.825% yield to maturity (press release)

  • Moody's re-affirmed PAA's rating and positive outlook with this offering, contingent on recovery in pipeline volumes

M&A/Growth Projects

• Equitrans Midstream announced revised in-service date to early 2021 (from late 2020) and raised cost estimate for its interminable Mountain Valley Pipeline (MVP) project (press release)

  • Project cost could go 5% over the latest $5.4bn cost estimate

• Blackstone Minerals (BSM) announced new incentive agreement with XTO Energy with respect to drilled but uncompleted wells (DUCs) in BSM's Shelby Trough acreage (press release)

Other

• Colorado Rising drops plans for several possible ballot initiatives oil & gas, including anti-fracking measures (Reuters)

• EQM Midstream (EQM) expected to be removed from Alerian Indexes when its merger with ETRN closes next week (press release)

• Summit Midstream (SMLP) to be removed from Alerian MLP Index in re-balance (press release)

Original post

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

Comments

[nimajoon62]

CEQP > ALL, ENUFF SAID.

[Aventador]

OKE was smart to grab some cash while it could. Could be 90% lower in a few months, who knows. Its the bird in the hand scenario. Its pretty clear looks like the oil higher euphoria has worn off.

[douglass.list.31moorgate]

Nice piece. In defense of OKE (which took some reflection), it's useful to imagine the likely sequence of events. 1) you figure you really need more equity, 2) the market is so volatile you can't be sure you'll be able to get it when you really need it, 3) an unexpected surge in the market gives you some headroom, 4) you put on a full court press to pull together an offering document despite the massive headache of working under COVID, 5) you tell your banker you're ready, 6) (guessing) your banker tells you, gee, the market might be even worse than we thought. Now what? At this point you are a price taker. You do this deal at the buyer's price or you don't do the deal (after spending a lot of resources and energy getting to this point). You still don't know if you'll get another chance. Every day is a new surprise. Maybe you should just be happy that the offering can get done today at some price. Others may not be so lucky. Pull the trigger. Wince a bit. Try not to kick the dog. Live to get the value back another day... A dividend cut is a major black eye that never leaves the scoresheet. A subpar equity raise is likely quickly lost in history.

[PalmDesertRat]

oke's issue has the smell of fear and desperation about it. don't be surprised if they reduce or eliminate the dividend.

[Vandooman]

Hard to say why the equity issuance but they would be insane to do it for no good reasons. Ensuring survival is often a good one. Making sure of cash for new projects is another. Keeping the dividend is another. They may figure the share price will come as a reciprocal of the dividend so when things calm down the dilution won't matter much. If the company is viewed as stable and they can afford the dividend and if commodity prices rally, it is unlikely that a 10.6% yield will be forever, so either the stock goes up or the dividend comes down. If they can afford the cash pay out the stock should go up. Sometimes investor confidence in a company is more important than increasing or maintaining the PE ratio.

Interesting.

[UndiversifyBC]

Don't think the shares sale is that problematic. Company said they are looking at roughly $700 million in additional growth capex this year. Don't really want to leverage up more so funding by equity easiest way to go.

Lots of midstream are forgetting about any significant growth capex for 2020 at all. So that might actually be a positive. And the pricing wasn't that bad. Roughly 11x ebitda I believe. No premium like OKE might have had historically but around current industry.

Wouldn't be surprised to see some dividend cut but probably planned to help shore up balance sheet. Which isn't really a bad thing.

[Vandooman]

Good comments. I have been a banker to a lot of companies in bad times. Falls under my cash for projects. Sometimes you should take the money and solidify the company.

[PipelineDancer]

First you raise with full distribution then you wait a quarter or two and cut it. Double effect of shoring up the balance sheet. No position.

[BeaBaggage]

Infrastructure (utes, roads, midstream, etc) will be facing low-zero rates- great for borrowing BUT not so great when looking to regulatory commissions for allowable ROR on investments.. several presentations I have reviewed are outlining this headwind.

[Vandooman]

Great comment beabaggage. Of course some regulators are more political than others. FEC is usually fair but, as you say, what is a fair return today?

[SayItWithLyrics]

I've watched EPD be pretty volatile over the years, but through it all they managed the company well and kept the distributions flowing. Over the 6 or 7 years I've held it, I've gotten paid close to $11 per share in distributions. Shares are now down about $5 from my basis (after the "horse trading I do in selling a little on rips and buying a little on dips). Would have been better putting all that money into AMZN or MSFT... Oh well.

In the meantime, I'm holding at $19 confident they will keep making distributions and that the stock will get back to my basis around $24. May take some time, but I can wait.

If I had to do it all over again, I probably would completely avoid the energy sector... but given that I'm in it, EPD is about as a good a place as any.

[Arimnestos]

Very similar situation. Started buying in 2014 and have bought all the way down to the low teens such that my basis is approx 24 as well. Wondering about the tax complications of your buying and selling of shares. Seems as if it would things difficult. Long EPD, MMP, and WMB

[Vandooman]

Not sure whether you mean your basis as what you paid or the reduced cost basis after returns of capital. Of course the latter doesn't matter in an IRA. Unlike many, I keep my MLPs in an IRA. I don't want any tax consequences in selling if I don't like the name anymore. In a taxable account you can easily have taxes to pay whether your stock is below what you paid or not. 5 years or more of returns on capital shrink your tax cost basis substantially. I had several at zero at one time. I hope all are aware that some of the gain above your tax basis will be taxed at your full incremental tax rate. There is a false idea out there that all will taxed at the capital gains rate.

[SayItWithLyrics]

@Vandooman

My basis includes my buying and selliing shares, but it excludes distributions. So with the stock at $19, plus having gotten $11 worth of distributions, I have a current net value of $30 and a basis of $24. 25% return over all those years is better than zero, but it isn't very good.

[usiah]

Your weeklies are always informative and helpful, Mr. Howard. Thank you.

Guess we're all in the dark for now on the OKE offering.

Retired income investor

[smurf]

Yeah, my EPD settled back to around where I bought it some time ago. Oh, well, it's the best in breed and I'm at least being paid well to to be patient.

Besides, this could be the time buy in, per the "greedy when others are fearful thing"! But, maybe not, as these midstream LPs are different animals.

[ggidley]

Thanks for the recap Hinds...always appreciate your work.