This week was very eventful for Permian gas markets. KMI noted in their 2Q earnings that GCX is expected to be placed in-service early and announced a 4th Permian takeaway pipeline – Permian Pass. In this week’s report, we dive into how these developments will impact Permian gas markets and which companies are most exposed to these abnormally low prices. Moving onto exports, we also take a look at global LNG markets and how US pricing is affecting prices abroad. Despite the weak pricing environment today, forward markets are signaling relief ahead.
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KMI confirmed that GCX is ahead of schedule with an expected in service by late September and some near-term spread benefits likely this summer. KMI also unveiled their third Permian gas pipeline – Permian Pass. If constructed, it would connect Permian gas with rising LNG demand targeting the Sabine, Golden Pass, and Port Arthur facilities. KMI has established itself as the clear leader on Permian gas takeaway. The other notable news was a $500M reduction in CO2 growth investment over the next few years primarily at the disappointing Tall Cotton asset. It is good that KMI is showing capital discipline. However, reduced investment in the E&P business will lead to declining production / cash flows, while drawing attention to this lower quality business. Lastly, Elba delays have been disappointing, but KMI had a confident tone that the issues are largely resolved.
Our 2Q19 EBITDA forecast of $1.87B is close to consensus. We see strong YoY growth in the Gas Pipelines segment, but a drop-off in the E&P business from a lower realized oil price. We estimate FY 2019 EBITDA is tracking 2% below budget due to delays in bringing on Elba LNG, 501-G rate settlements, and weaker NGLs. However, these headwinds may be partially offset if Gulf Coast Express (GCX) comes online ahead of schedule. 2019 DCF may be tracking closer to budget given low interest rates and KMI’s significant floating rate debt. We stay Underperform rated but raise our TP by $1 to $19 on use of higher multiples reflective of investor preference for C-corp midstream stocks.
We Recently Spent the Day With CFO Steve Filton meeting with investors, with questions focused upon trends in both the acute and behavioral segments, the expected trajectory thru YE’19 to hit guidance, updates on DOJ settlement negotiations and the co’s thoughts on capital deployment including M&A and share repurchase. Overall, UHS mgmt has had a positive tone on operating results rebounding post the lower acuity seen in the first two months of Q1’19 and that continued during our set of meetings. While we see expectations as fairly modest for the co. given Q1 acute weakness and ramping growth embedded in guidance we came away incrementally more constructive on #s. We raise our conservatively biased EBITDA est. by ~2% to $1.835B ($10M below consensus) w/YE’19 PT up to $143 from prior $134.
Reports of line fill starting shortly on PAA’s Cactus II crude pipeline and EPIC filing interim tariffs for crude service on their pipeline have put more focus on marketing businesses as Permian crude spreads likely narrow. In the report we give estimates of key companies’ exposure to narrowing Permian crude differentials. Separately, while current NGL prices remain very weak, the forward curve is showing steepening contango which should create opportunities for NGL storage assets. We show storage capacity and discuss the opportunity for key NGL players within our coverage such as EPD, ET, OKE and TRGP.
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SO – Files GA Power rate case, seeks 10.9% ROE with 10-12% band and 56% equity ratio; expected
KMI – Binding joint tariff open season with TGE for crude transport from the Bakken to Cushing
MMP/PAA – Announces 100 mbd expansion of Saddlehorn pipeline
Permian – Cactus II to begin line fill as soon as this week
Midstream of Consciousness – June stock performance – winners, losers, and balance sheets; Responses from FERC’s ROE NOI
The market was up big in June, with the S&P capping off its best first half since 1997. Rising global tensions helped propel oil up, and the E&Ps and broader energy with it. Midstream lagged the market and energy peers, though it was still able to offset May’s decline. In this week’s report, we dive into June and year-to-date performances for our coverage, and whether or not the balance sheet trade has worked so far. Also, last week comments were due on FERC's notice of inquiry regarding its policy for determining ROEs for utilities and pipelines. Based on the responses, pipeline companies are in agreement that an updated methodology is needed while shippers voiced the contrary, hinting that an amended policy could lead to higher rates.
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