February is the sort of brutal month where everyone starts to be convinced that winter will never end. And yet, by the end of the month, or maybe into March, while it isn’t spring yet, somehow, you start to notice that it isn’t quite as dismal as you’d taught yourself to believe. It is shockingly similar to the way investors are looking at a recovery (or even a bottom) to energy. This month, given the ongoing concern about E&P companies and counterparty risk, I’ll mostly talk about what happened with the energy industry in general, and how that relates back to the infrastructure companies.
February opened with the total energy MLP market cap dropping below $300 billion, a level not seen since 2011. February finished with 51 of the 120 MLPs trading in the single digits (for $278 billion in market cap). But let’s go back to the beginning of the month: on Groundhog’s Day, S&P put 20 energy companies under ratings review, including Exxon (XOM), one of only three AAA rated companies. Moody’s confirmed the investment grade rating of EQT Corporation (EQT), but downgraded several other E&P companies from investment grade to junk. Now, while E&P corporations are not MLPs, many of them are the customers of midstream MLPs, and a very small number own the MLP GPs.
In other bad news, Jamie Welch, CFO of Energy Transfer Equity (ETE), also stepped down. He has long been one of my favorite presenters in the MLP space. With the news coming with no conference call, explanation, or even a press release, it just feels like we’re being abandoned. (Speaking of Energy Transfer, at this point, the spreads for the deal to buy The Williams Companies (WMB) have blown out so far that it’s really anyone’s guess whether it will go through.)
So, that’s the bad news, but WPX Energy (WPX) announced that they’ve sold assets in the Piceance totaling nearly $1 billion, and the deal was positively received by the media, just because it was completed. Despite the assets changing hands, the existing wells still have 2 trillion cubic feet of proved developed producing reserves.. Terra Energy Partners, the company which bought the assets still intends to produce the natural gas, after which it will need to be processed, transported, and stored before being used to heat homes or generate electricity. Terra has an $800 million equity backing, as it is a portfolio company of private equity firms Kayne Anderson and Warburg Pincus. This is only a small sample of the committed private equity money waiting to enter the M&A market.
T Boone Pickens may be out of oil stocks while waiting for inventories to come down (crude inventories topped 500 million barrels for the first time in 80 years), but Berkshire Hathaway just bought 26.5 million shares of Kinder Morgan (KMI). It’s not just PE money entering the space, and the money isn’t just going to E&P.
The EIA expects worldwide supply/demand balance for oil to return in mid-2017, signaling the final end to the storm. However, the much more pertinent information for investors is when will sentiment shift? When will we finally believe not only have things stopped getting worse, but that they might actually start to get better?
Sentiment moves ahead of fundamentals, so just to take a quick peek forward, beyond this recovery and into the next piece of bad news: Tesla’s drastically cutting the price of its next electric car, and even Ali Al-Naimi (Saudi Arabia’s oil minister) says that solar is the answer to our energy needs. Renewable electricity increases were greater last year than fossil fuel increases..
That first spring day will come, where it finally feels warm and all the women in New York wear their first sundress of the year. Economics 101 will eventually prevail and supply/demand balance will return to energy. No one knows quite when it will happen, and it may take us all by surprise.
Edited to include a link to EQT as well as to correct the formal name of WMB.