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Energy pipeline rally may signal turnaround for depressed sector, analysts say

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Essential Energy Insights - September 17, 2020

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Energy pipeline rally may signal turnaround for depressed sector, analysts say

A stock price rally sweeping North America's energy pipeline sector could indicate a material turnaround for some beleaguered equity values, some industry experts said.

"We spent December talking [investors] off the ledge," Simon Lack, managing partner at the energy-focused investment firm SL Advisors LLC, said in an interview. "What's happening right now is there are no sellers. … I have a full day today and probably tomorrow of investor calls with potential buyers of the sector."

The midstream sector's bellwether Alerian Master Limited Partnership Index was up nearly 12% in the first days of 2019, outpacing the S&P 500's 2.7% gain to Jan. 8, after a rough 2018 in which investors' frustration with the cash-leaking MLP model and declining oil prices translated into a 19% plunge in the Alerian.

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The poor 2018 culminated in a midstream energy stock plummet in December, even after many sector players simplified their corporate structures to address investors' concerns about the master limited partnership model and reported strong consecutive quarterly earnings.

With the price of West Texas Intermediate crude oil back up 9.6% so far in 2019, settling at $49.78 per barrel on Jan. 8., investor sentiment is improving. "I am cautiously optimistic that we see a big sustained rally in midstream this year after [simplification] transactions settle and clear out. On the other hand, the market needs to differentiate and signal to management teams what behaviors they'd like to see," CBRE Clarion Securities analyst and MLP expert Hinds Howard said in an email.

"I hope after what has been a violent across-the-board rally where 'junk' or lower-quality companies have ripped higher ... to see differentiation based on financial health, self-funding and visible growth," Howard said.

He added that the market also still needs to pressure partnerships such as Phillips 66 Partners LP, DCP Midstream LP and Shell Midstream Partners LP to get rid of their incentive distribution rights obligations to their general partners.

Robert W. Baird & Co. Inc.'s Ethan Bellamy, on the other hand, said a sustainable midstream equity rally would require a significant boost to the broader macroeconomic outlook, including some sort of trade deal between the U.S. and China, an end to the U.S. federal government shutdown, and crude oil production cuts from Saudi Arabia.

"Without a healthy economy and equity markets, midstream stocks will head back into the doghouse," he wrote in an email.