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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.
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.
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.
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.
While ET’s story can sometimes be a bit of a rollercoaster, financial results have been consistently good for a while. 1Q19 EBITDA beat our forecast by 1% and consensus by 6% when adjusting for a one-time inventory benefit. FY 2019 EBITDA guidance of $10.6B - $10.8B was reiterated. ET signaled they are tracking toward the higher end and we think they can beat the outlook, particularly if Permian gas stays weak. There was a more conservative message on capex this quarter at a $3-4B run-rate vs. prior indications of not slowing down from this year’s $5B. The company will now target 4.0x – 4.5x leverage, down from 4.5x previously. We think this is a good move and shows a larger focus on leverage, but note it may take a couple of years to get there using Moody’s calculation basis.
After market close today (5/9/2019), ET reported 1Q19 EBITDA of $2.8B, which was 5% above our estimate and 9% above consensus. ET stock yields 8% and coverage was over 2x for the quarter. The company reiterated FY 2019 EBITDA guidance of around $10.7B, which seems conservative to us since Q1 results equal 26% of FY guidance. ET also reiterated growth capex guidance of $5B. This is another strong result.
In this week’s report we discuss our thorough review of CEO compensation in the sector and also give thoughts on upcoming earnings for the week ahead. On executive comp, total CEO pay was up a lot last year alongside generally strong financial performance but poor stock performance. In the report we show a lot of data on which CEOs are paid the most, different incentive structures, who is incentivized to sell, and other interesting tidbits from our review. For earnings, results last week were strong and we expect a continuation this week. We think ET should have a Q1 beat, the TRGP call will be important, and we should hopefully have news on the Capline reversal project for PAA. See the full report for details.
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