There’s rarely a shortage of bearish articles. The recent batch incorporates a tone of pleading, or at least reasoning, with investors to acknowledge our circumstances when choosing investments. One of my favorites is a New Yorker essay from mid-May, which asked Have The Record Number Of Investors In The Stock Market Lost Their Minds? The writer meets a retiree over socially distanced golf who is spending his free time trading stocks. No wonder the market’s been rising.

The underlying theme of all these articles is that, since we can all see the economic destruction ourselves, through shuttered businesses and a record leap in unemployment, how can the stock market be so stupid. Some concede that markets only react to surprises, not what’s expected. But being bearish nowadays seems the only socially acceptable view. It’s rather like wearing a mask if you’re near other people – being considerate towards all the victims of the pandemic and their families requires masking up and dumping your investments.

Journalists are expected to explain events as well as report them. So in early May, following six weeks of an inconsiderate market rally and an increase of U.S. deaths from below 1,000 to over 80,000, the New York Times published Repeat After Me: The Markets Are Not The Economy. This followed on April’s failure to inspire reasoned judgment, led by articles such as Everything Is Awful. So Why Is the Stock Market Booming?

The Wall Street Journal feels little compunction to put their humanity on display, so their offerings are less judgmental and more businesslike, such as The Stock Market Is Ignoring The Economy.

Forbes followed their practice of presenting all possible views, which ensures at least some will be right. In early March, The Stock Market Is Still Overvalued, Here’s Why preceded the actual low by a couple of weeks, but was still published some 300 S&P500 points below where we are now. This was only helpful for the most agile investor. But a couple of months later Forbes offered more optimism, with, 5 Explanations For The Disconnect Between The Stock Market And The Economy. By coincidence, the S&P500 was roughly back to where it had been two months earlier, so these two articles book-end the V-shaped drop and recovery. In case this sounds overly critical of Forbes, I should note that your blogger occasionally writes for them as well, a fact some may feel says much about their standards.

But my favorite article is from the New York Times magazine: What Is the Stock Market Even for Anymore? What stronger indictment can be leveled at investors if they stubbornly refuse to sell everything, than to find them irrelevant? The writer starts out by correctly predicting the market’s fall, but then his prescience drives increasingly confident, more dire predictions that are badly wrong. It leads him to search for experts that are more bullish.

A crash surely won’t help our situation, but at least will affirm its gravity. A resurgent market supports the view that this too shall pass, that the world over-reacted. If the virus was that bad, surely stocks would be lower.

So the market grinds higher, confounding a great many. Prices still look attractive to us (see Stocks Look Past The Recession and Growing Debt). But pipelines look like a screaming buy, with yields well over 9% and the momentum of leading the rally since March, with the American Energy Independence Index having almost doubled. What seems certain to us is that, if the S&P500 continues to climb its wall of worry, it will still be outpaced by midstream energy infrastructure, with its recently reaffirmed and excessively high dividend yields.

We publish the American Energy Independence Index and are invested in the ETF that tracks it.

The energy sector has been leading the market’s rebound from the lows of March. Demand for crude oil plummeted, and the Saudi decision to simultaneously increase supply caused prices to briefly go negative. No investment sector in energy was safe, including midstream infrastructure.

U.S. oil production has already dropped by 1.6 Million Barrels per Day (MMB/D), from 13.1 MMB/D in mid-March to 11.5 MMB/D now. First quarter earnings calls updated investors on the collapse in demand. Magellan Midstream reported gasoline demand was down 24% in April (see More Solid Pipeline Results). Jet fuel was down by 75%.

However, there’s more to the U.S. energy business than crude oil. Natural gas demand has remained solid, helped by continued substitution away from coal. And propane exports have risen – as India’s refineries are producing less gasoline, they’ve also cut propane production which is often part of the same process. So we are exporting more propane to India, where it’s widely used for cooking.

The continued rise in the American Energy Independence Index (AEITR), which includes all the biggest pipeline companies in North America, reflects increasing optimism that economic activity is returning. The charts below show interesting data from Apple that estimate how much people are traveling based on their requests for directions from Apple Maps.

People are walking and driving more, although Atlanta is closer to normal than New York. What’s also interesting is that mass transit use isn’t recovering as quickly. Almost 21 thousand people have died in New York City, about a fifth of the U.S. total. There are many reasons for this concentration, but extensive use of mass transit is likely one of them. The public has clearly reached that conclusion. Although many expect working from home to reduce energy consumption for commuting, if large numbers of people avoid mass transit it’ll boost gasoline consumption, to the extent that it results in more road trips.

All 50 states are relaxing constraints. I for one have been amazed – shocked, in fact – at how easily state governors can restrict our freedom for an extended period of time with seemingly little legislative oversight. The gradual recovery in travel is a welcome sign that we’re emerging onto the other side of the pandemic.

Airline activity is starting to pick up as well – in recent days the TSA reports air passenger traffic reached 15% of normal, doubling from early May. Signs are that America is gradually emerging from its lockdown. The consequent increase in energy use is drawing investors to the sector.

We are invested in Magellan Midstream, and all the components of the AEITR.

One of the few pleasant surprises of recent weeks is that business for the major pipelines remains solid. Now that 1Q earnings season is complete, we have revised guidance from all the companies in the broad-based American Energy Independence Index.

Caution was evident throughout on earnings calls, as one company after another described the impact of collapsing transportation demand and the high degree of uncertainty around forecasts. Some of the figures were stunning — Magellan Midstream reported a 20% drop in demand for refined products (mostly gasoline) in April, and a 76% drop in jet fuel, although they did note an improvement in the latter part of the month.

As we entered 2020, the expectation for rapidly growing Free Cash Flow (FCF) underpinned a positive outlook for the sector (see The Coming Pipeline Cash Gusher from April last year). We provided a current look two months ago (see Updating the Coming Pipeline Cash Gusher), but with minimal new guidance.

With new guidance provided on earnings calls, EBITDA and Distributable Cash Flow (DCF) have generally been revised down by 10-15%, a much smaller drop than many feared in March when the sector plunged. So our 2020 DCF forecast is now $51BN, versus $60BN a year ago. There is exposure to volumes and prices, but long term “take or pay” contracts provide solid support at times like this.

Spending on growth projects is being cut at roughly the same pace. Every dollar not spent boosts FCF. Investors regard this as welcome acknowledgment of reality – energy management teams have often been too ready to reinvest back in their business, similar to their upstream customers.

The top ten midstream energy infrastructure companies have shaved over $5BN from this year’s growth plans. Since there’s rough alignment between the drop in DCF and reduced growth capex, FCF still looks likely to double this year versus last. There can’t be many sectors that can be expected to generate such a result.

In turn, this is supporting dividends which are, for the most part, still being paid (see Pipeline Payouts Holding Up).

The story isn’t as positive for MLPs, which have been much more active in slashing payouts. The MLP-dedicated Alerian MLP ETF (AMLP) lowered its dividend again recently, reflecting what its components are doing. Compared with the midstream energy infrastructure sector, MLPs have more liquids/less natural gas exposure, more risky gathering and processing, and are more leveraged (see More Solid Pipeline Results). Only two of the ten biggest pipeline companies are MLPs, and size tends to bring diversification of flows as well as stability.

Even after incorporating the impact of Coronavirus, FCF is still expected to double year-on-year. If it happens, it’ll represent a stunning turnaround for a much maligned sector.

It’s still too uncertain to extend that forecast out to 2021. Few companies would offer any type of confident guidance. In our first piece on the topic in April 2019, we were originally looking for FCF to double again next year. That would push the sector’s FCF yield above 11%.

This is why the rebound from the lows of late March has so much momentum.

Energy has rebound strongly from the market’s low on March 23rd. The S&P Energy ETF (XLE) is up 64%, matching the broad-based American Energy Independence Index (AEITR) and handily beating the S&P500 which is up 31%%. Although the YTD figures still show the energy sector down over 35%, quarterly earnings reports continue to provide plenty of positive news (see More Solid Pipeline Results, Pipeline Payouts Holding Up and listen to our recent podcast, Pipeline CEOs Provide Optimism).The story with MLPs continues to be less positive. 24 have now reduced or eliminated distributions in recent weeks, according to MLPData.com. The Alerian MLP ETF, AMLP, reduced its distribution again last week, such that it’s now 50% lower than five years ago.

This reflects the general trend of MLPs in recent years.Investors in MLP closed end funds (CEF) have had an even worse deal. Many CEF fund managers exhibited reckless arrogance in maintaining maximum leverage during the collapse in March (see The Virus Infecting MLPs). The strong rebound in energy hasn’t helped much – for example, the Tortoise Energy Infrastructure fund (TYG) is still down 75% for the year. Like other MLP CEFs, they were forced to dump positions at the lows in late March, locking in permanent losses and increasing the unrealized losses of those investors who prudently avoided leverage.
Tortoise recently followed this up by announcing they were suspending distributions on three of their MLP CEFs. MLP investors are by now de-sensitized to such abuse. MLP CEFs have destroyed enough capital that they’re no longer a meaningful factor in the sector.

MLP earnings calls have included some long overdue criticism of management teams. The sycophantic analyst who precedes his question with “great quarter guys” is receding as investors count the cost of poor management. JPMorgan’s Jeremy Tonet questioned Enlink’s generous stock-based compensation, which he pointed out was an eye popping $9MM in the quarter, and quite dilutive. It’s a transfer of over 1% of the company’s market cap each quarter. Tonet followed up as seeming bewildered as to what were the key metrics for that compensation, since it’s been relatively constant for several quarters while the business has deteriorated.

Plains All American, a large crude oil pipeline operator, received some pointed feedback from Ganesh Jois of Goldman Sachs: “Firstly, on your CapEx outlook for 2021 and beyond; in a flat to declining U.S. production environment, I’m wondering what it is exactly that you might be thinking of spending on? And the second question I have is, we’ve now seen 3 distribution cuts from you all. At what point is a unitholder going to be prioritized when it comes to capital allocation, as opposed to bondholders and generally asset build-out?”

In other words, why are they still spending any money on new crude pipelines. They just took a $2.5BN impairment charge, the cost of overpaying for acquisitions in years past. They’re still planning to spend $1.1BN this year. As serial mis-allocators of capital, you’d think they’d take a break from it for a few quarters.

The contrast with bigger corporations like Enbridge and Pembina is stark. These companies keep paying their dividends and have a conservative culture that rewards investors over the long term.

The lesson is increasingly clear; pipeline corporations generally have better corporate governance and are run more conservatively. Most MLPs are to be avoided. The big ones (Enterprise Products; Energy Transfer and Magellan Midstream) are worth holding, but many smaller MLPs that too often look as if they’re run for the benefit of management should be avoided.

MLP-dedicated funds, such as the now diminutive MLP CEFs mentioned above as well as AMLP, are stuffed full of the MLPs which have few other natural buyers. The outperformance of pipeline corporations versus MLPs is well established, and likely to continue.

We are invested in the names mentioned above.

Earnings season for big pipeline companies has continued to be encouraging. Enterprise Products (EPD) reported results largely as expected and lowered 2020 growth spending by $1BN. The reductions in capex have been welcomed by investors who have long complained about the level of reinvestment by energy companies. Any reductions in EBITDA have been matched by lower outlays on new projects, which supports free cash flow.

Jim Teague, EPD’s CEO, opened the call by remembering an outbreak of polio as a young boy, “It was a highly contagious virus. It struck without warning…my mom contracted polio…we practiced our own kind of social distancing. What I don’t remember is shutting down the entire economy and 30 million people losing their jobs in one month.”

Teague offered another personal perspective, ”As a young naval officer in an attack helicopter squadron in the Mekong Delta, Vietnam, I took a great deal of pride that I was part of a special fraternity. I have that same kind of pride today.” The wartime analogy strikes a chord with many.

EPD maintained its distribution. When asked about customers claiming force majeure to get out of take-or-pay pipeline contracts, Teague responded, “We’ve looked at all our contracts, and we feel pretty comfortable that we’re not going to have any issue with force majeure as it relates to price.”

Cheniere Energy handily beat expectations with their 1Q20 results. Of more concern to investors is the outlook for Liquified Natural Gas (LNG) shipments, with reports of as many as 20 being delated or cancelled. CEO Jack Fusco addressed this in his opening remarks,”…our long term contracts do not include provisions for renegotiations.” He added, “In instances where that (cancelation) occurs, the fixed liquefaction fee is still paid to us and our marketing affiliate has the option to market the volume into the global marketplace.”

Cheniere continues to expand their export facilities, both at Sabine Pass, LA where they’re adding a sixth train and also at Corpus Christie, TX. They don’t expect coronavirus to harm either the cost or completion schedule of these projects. They reaffirmed previous full year guidance on distributable cash flow and EBITDA.

Magellan Midstream provided some interesting recent volume statistics, in that refined product demand was down 24% in April but “only” 20% in the last week of April. CEO Mike Mears thinks that this category could return to last year’s levels by 3Q20, which most would agree is more positive than consensus.

One analyst asked about interest from private equity firms in acquiring publicly traded MLPs. Mears responded, “We haven’t spent a lot of time talking to private equity firms about acquiring Magellan. That wouldn’t be at the top of our list.”

TC Energy noted that their outlook was largely unchanged with their CEO Russ Girling commenting on their Friday afternoon earnings call that “with approximately 95% of our comparable EBITDA coming from regulated or long-term contracted assets, we are largely insulated from the volatility associated with volume throughput and the commodity prices that are being experienced by many others. Aside from the impact of normal maintenance activities and seasonal factors to date, we have not seen any meaningful change in the utilization of our assets, which further reinforces their critical nature to North America.”

Large midstream companies are generally maintaining dividends and where 2020 results are guided lower, cuts in growth spending more than offset (see Pipeline Payouts Holding Up). In the 2014-16 downturn, MLP distribution cuts were widespread. The payout on the Alerian MLP ETF (AMLP) is the lowest in its history, and 36% below its level of 2016. In a familiar story, 21 MLPs have recently cut distributions. EPD and MMP are an exception to this pattern, which puts them in the company of large pipeline corporations. The components of the broad-based American Energy Independence Index (which is 80% corporations) currently yield 10.5%.

We are invested in all  all the names  mentioned above.