The biggest North American midstream oil and gas companies were stung at the stock market in the fourth quarter of 2018; all but one of the top 10 companies experienced double-digit percentage decreases as the price of crude oil plummeted and uncertainty lingered about the sector's fiscal habits.
Energy Transfer LP units suffered the steepest loss, dropping 24.2% to finish the year at $13.21, even after completing a $26.55 billion internal merger that investors and analysts had pressured the management team to undertake to abandon the fading master limited partnership model. The stock traded under the name Energy Transfer Equity LP until the merger closed Oct. 19, 2018, creating Energy Transfer LP.
Oneok Inc. shares had the second-largest slump among the top 10 by market cap in the fourth quarter, falling 20.4%, while Canadian midstream major Enbridge Inc.'s stock price had the best performance in the group with a decline of 3.7%.
The struggling equity values, reflected in the Alerian MLP Index's 18.9% loss during the period, correlated with West Texas Intermediate crude's 38% drop in the fourth quarter to settle at $45.41 per barrel Dec. 31, 2018.
Midstream stock prices' decline also reflected investors' pessimism about management teams' promises to rein in distribution growth and debt levels, according to CBRE Clarion Securities MLP expert Hinds Howard. "Midstream is attempting to reinvent itself. ... But many midstream operators remain far off from lofty goals [and] self-funding targets, with leverage and capital spending being the main sticking points," he wrote in a Jan. 1 blog post. "The market appears to believe midstream companies will revert to their spendthrift, levered-up ways when given a chance."
Analysts at energy investment bank Tudor Pickering Holt & Co. said in a Dec. 28 note to clients that they expect the recent midstream volatility to be temporary. "We're mindful of the old saying that the market can remain irrational longer than you can remain solvent, but ... this too shall pass," they wrote.
For full year 2018, LNG exporter Cheniere Energy Inc.'s share price outperformed the rest of the top 10 midstream group, gaining nearly 10%. Oneok, up less than 1%, was the only other company whose stock rose during the year.
Williams Cos. Inc. stock had the biggest year-over-year drop, 27.7%, despite completing a $10.5 billion merger with its MLP and multiple quarters of strong financial results. Cheniere and Enbridge, whose unit price fell 20.5%, also completed corporate reorganizations in 2018.
"One of the issues that makes current investors nervous and gives new ones pause is that they don't understand the continued weakness when volumes are up and management teams bullish," Simon Lack, managing partner at energy-focused investment firm SL Advisors LLC, wrote in a Dec. 30 blog post. "For most of 2018 and certainly the second half, the disconnect between strong operating performance and poor security returns has perplexed many."
The Alerian MLP Index lost 19% in 2018, while West Texas Intermediate oil prices slumped 24.8%.