Midweek Recap: Another Week, Another Offer for Discounted Midstream Assets

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courtney

Midstream Performance

Midstream performed exceptionally well this week in the face of rising interest rates, falling S&P 500 and falling crude oil prices. Midstream’s 1.9% weekly gain outperformed the weighted E&P index (XOP) and the index energy sector in the broad sense, as reflected in (XLE), which increased by 1.7% and 1.3% respectively.

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The big midstream news this week was the proposed acquisition of DCP Midstream (DCP) by Phillips 66 (PSX), which we’ve covered here. The offer was made at an EBITDA multiple of 7.4x, which we consider a lowball offer. DCP unitholders should expect a watered down offer around $40.

The acquisition would further winnow the pool of large MLPs, bringing the total to seven with a market capitalization over $5 billion. The deal sparked speculation about the next MLP to be acquired, which in turn prompted investors to bid on sponsored MLPs like Cheniere Energy Partners (CQP), Holly Energy Partners (HEP) and Delek Logistics Partners (DKL). ). Smaller MLP units like Genesis Energy (GEL) and Crestwood Energy Partners (CEQP) also gained after the PSX offering as investors speculated they would be acquired by larger energy companies seeking of assets sold at a discount on public markets.

Speculation had MLPs outperforming C-bodies during the week.

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MLPs have long traded at a discount to C-bodies. Yet their outperformance only narrowed the gap slightly. On a valuation basis, mid-tier MLPs continue to trade at a discount to their C-corp counterparts. We continue to favor MLPs as long-term equity investments due to their superior prospects for appreciation and revenue growth relative to C-bodies.

Royalty trusts and larger MLPs, both of which are less attractive as acquisition candidates, lagged during the week. We used their underperformance to increase our position in MPLX (MPLX) during the week, as explained here.

Weekly MLP Portfolio Recap from HFI Research

Our portfolio outperformed its benchmark, the Alerian MLP Index, by 0.5%.

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HFI research

Martin Midstream (MMLP) jumped 9.5% without news. Units had fallen far too low given the company’s improved operating performance and financial condition, which made refinancing more likely. We used the dip to acquire more units, as discussed here.

EnLink Midstream (ENLC) units increased by 6.4%. Most of ENLC’s weekly gain came on the heels of the DCP announcement and is likely due to a rotation of investors and ETFs to an alternative G&P, even though ENLC is treated as a C-corp for purposes tax.

Cheniere (LNG) showed continued strength amid record LNG prices resulting from Europe’s efforts to shift shipments away from Asia. European governments are taking all necessary steps to secure natural gas for the winter.

As for the four losers of the week, each was weak on no news.

Our holdings saw higher than normal insider buying and selling activity during the week, as shown below.

  • Calumet Specialty Products Partners (CLMT) Executive Chairman Stephen Mawer purchased 4,321 units at an average price of $16.17 for an investment of $69,867.
  • Energy Transfer (ET) CFO Brad Whitehurst purchased 10,000 units at an average price of $11.50 for an investment of $115,000.
  • Anne Psencik, Chief Strategy Officer of Kinetik Holdings (KNTK), sold 2,466 shares of KNTK for $39.10 for proceeds of $96,421. The sale was only 1.6% of Psentik’s holdings, so we see nothing there.
  • KNTK CEO Jamie Welch bought 1,100 shares at an average price of $38.53 for an investment of $42,383.

News of the week

August 16. Energy Transfer (ET) concluded the sale of its 51% stake in Energy Transfer Canada to a joint venture that includes Pembina Pipeline Corp (PBA) and global infrastructure funds managed by KKR. PBA’s management is excited about its acquisition of the assets and is planning additional investments. Meanwhile, the deal helps ET deleverage in accordance with the credit rating methodology of major rating agencies. This brings ET one step closer to management’s goal of increasing the quarterly payout to $0.305.

August 16. Plains All American (PAA) is explore expansion of its Fort Saskatchewan NGL storage and fractionation facilities. PAA’s Fort Saskatchewan is an attractive asset that should benefit from increased Canadian NGL production and growing global demand. Canadian natural gas prices have recently fallen as Canadian natural gas production nears 14 Bcf/d and offtake constraints in Western Canada. Lower prices could help PAA capture a large frac spread as it markets its NGL products in eastern Canadian and US markets.

August 18. Tellurian (TELL) completed its acquisition assets of EnSight IV Energy Partners in Haynesville for $125.5 million. TELL expects the agreement to increase its natural gas production to 250 MMcf/d. He financed the acquisition with available cash. TELL’s goal from inception was to purchase upstream assets to secure feedstock for its LNG production, and this deal advances that goal. TELL has yet to secure funding for its Driftwood project. As long as Driftwood’s future remains uncertain, TELL’s stock is far too speculative for our liking.

August 18. A federal judge guarded jurisdiction following Michigan’s lawsuit to shut down the Enbridge Line 5 (ENB) pipeline. Michigan had sought to transfer the case to federal court, so the decision is a victory for ENB. The judge ruled that regulating Line 5 is a federal matter and asserted that the state was playing games with the judiciary by trying to change the legal forum. Michigan’s attempt to shut down such a vital source of propane due to the remote risk of a pipeline leak is beyond our comprehension.

Capital markets activity

August 15th. MPLX (MPLX) announcement the repayment of its $500 million of 2.500% senior notes due December 1, 2022 and $500 million of its 3.375% senior notes due March 15, 2023. The notes will be redeemed at par.

August 16. EnLink Midstream (ENLC) announcement pricing of an increased offering of $700 million principal amount of 6.500% senior notes due 2030. ENLC plans to use the proceeds to fund the redemption of its 4, 40% due 2024 and its 4.15% senior notes due 2026.

August 17. Enbridge (ENB) announcement that none of its Series L Cumulative Redeemable Preferred Shares will be converted into Series M Shares on September 1 as less than 1 million Series L Shares required for conversion have been tendered.

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