Over the past few months LNG prices have looked a lot like NGL prices, testing lows from several years ago. Global spot prices are now at their lowest levels since mid-2016 as a result of seasonality, China trade uncertainty, and the LNG capacity additions so far this year. Despite the weak signals from the short term market, we still see some constructive news flow from LNG – the last of Corpus 2’s original 7 liquefaction trains announced it is beginning to liquefy gas last Thursday, Poland has shown continued interest in US LNG, and Cameron 1 is nearing commercial operations. In this week’s report, we discuss these drivers and what they mean for LNG markets and several of our companies in greater detail.
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The highlight this week in midstream will be Plains’ annual Investor Day in NY on Tuesday. The company has done a good job of simplifying the investment proposition and we’ll be looking for any new financial guidance, updates on the Permian strategy and overbuild risks, and key project updates. Transitioning to NGLs, the composite NGL price continued to fall last week and is now down a remarkable 24% YTD when oil is up almost 20%. We touched base with EPD and discuss latest thoughts on the NGL supply-demand balance in the report and what weak pricing could mean for TRGP’s 2019 guidance. Lastly, MPLX’s FID on the Whistler pipeline is a relief for Permian gas, but doesn’t change our view that new pipeline additions are primarily just preserving the status quo more so than improving the outlook, with severe price constraints still likely for the next few years.
On Monday (6/3/2019) Cheniere set out a financial plan that made us feel even better about it being a top midstream idea. Updated guidance was stronger than expected, it is already making headway on commercializing Corpus midscale, and it has painted a picture of nearly 20% DCF yield potential and an investment grade balance sheet. We had been hoping for more visibility on a dividend but investment grade credit in the next 3-5 years is a plus and would address a lingering investor concern. Outperform.
We’ve been on the road meeting with clients in TX, CA, NY, and the Southeast, as well as at the MEIC conference. We discuss detailed feedback from investors on each of the stocks in the full report. Looking back at May performance, it felt like a rough month in the market. The S&P 500 fell 6.6%, oil by 16.3%, and the E&Ps by 17.3%. Typically this would be a bad sign for midstream...but the group finally traded defensively in May, or utility-like we might say with only a 2% decline. Perhaps this was just dividend support as bond yields fell, or maybe midstream finally de-linked from broader energy which would be encouraging.
On 6/3 Cheniere will be holding an investor meeting in NYC. Management has indicated it could include a positive FID on Sabine Pass 6 and a framework of a capital allocation policy. We also believe that LNG could boost the overall run-rate EBITDA outlook higher reflecting its work on enhancing output from the trains. We believe SPL 6 should add $400-$600M of annual EBITDA, and the updated total EBITDA range (9 trains) could be in the $5B-$5.5B range.
We thought the tone at last week’s MEIC conference was positive. Companies are executing on their plans and continuing to grow. Investor focus is on growth opportunities within existing business platforms, capital discipline, and some newer areas like M&A, ESG, and water infrastructure. Equity needs, leverage, coverage, and structural questions have generally faded as big topics from a year or two ago. There is some concern, however, the sector will transition back to an overbuilt environment with investors wanting to understand the implications. See our detailed recap of key industry themes and company takeaways in the full report.
In this week’s report we discuss the stronger than expected Q1 earnings, which resulted in an average EBITDA beat of over 5% for companies in our coverage and average YoY DCF/sh growth of ~10%. Investor focus was on commodity pricing, particularly with regards to NGLs, and mega project risk given recent struggles with MVP, L3R, and KXL. We also dive into recent M&A trends in midstream after the announced acquisitions of BPL and ANDX, and what this means for valuations moving forward. Please see the full report for details.
The MLP and Energy Infrastructure Conference (MEIC), will be held May 14-16. Many MLP management teams will be in attendance with a larger number of C-corps this year as well, notably ENB, KMI, TRGP, and LNG. We’re looking forward to it. Four of us Wolves, running around the desert together in Las Vegas. This report is a helpful guide for investors attending and includes lots of questions to ask companies, as well as summary model information. Key industry topics are discussed below with company-specific topics in the body of the report.
Cheniere beat expectations on Q1 and reaffirmed the 2019 outlook, addressing investor concerns on its near-term exposure to spot LNG markets. The company keeps demonstrating the ability to execute, even in more depressed market price environments. We continue to believe that Cheniere is a compelling contracted free cash flow story with significant upside potential from new liquefaction capacity. We reiterate our Outperform rating.
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