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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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.
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.
Earnings season shifts into full gear this week with 7 companies in our coverage reporting their Q1 earnings – ETRN/EQM, ENBL, EPD, OKE, MMP, WMB, and TRP. In this week’s report we highlight what to expect heading into the releases and key topics that are likely to be discussed on the calls. We have also revised our price target on KMI after updating our models with the 10-Q and latest thoughts. We reiterate our underperform and discuss key changes to our estimates, notably with regards to growth capex. For a more detailed discussion please view our full report.
EPD will hold its Analyst Day on Wednesday (04/10/19) and we expect a heavy focus on the demand side of the equation (exports / petchem) as the key to driving growth up the value chain. A couple of potential new projects could be ripe for announcement, but we don’t think there are high expectations on this front. Commentary on NGL pricing, capex expectations, buybacks, and the old C-corp conversion topic are likely. Turning to M&A, Stonepeak’s $3.6B acquisition of the Oryx Permian crude gathering and intrabasin pipeline network last week marked the latest move by private capital to acquire midstream assets. We attempt to quantify a valuation of the deal in the report, which we think is attractive and a positive read-thru for PAA. From a sector perspective, private equity feels frothy to us and public midstream companies should be aggressively looking to take advantage by selling non-core assets or selling down assets through JVs to create value. See the full report for more.
This week we highlight three midstream treasure hunts – NGLs searching for demand, Waha gas in desperate need for a pipeline, and investors seeking capital discipline. Starting with NGLs, midstream investors watching oil steadily grind higher may not realize NGLs have lagged badly with pricing at 1-year lows relative to oil. We discuss our latest thoughts and potential for NGLs to recover later this year. Next we turn to Permian gas where pricing the past two weeks has only increased our concern that the basin will remain heavily constrained for a while with big downside risk to pricing. Lastly, we give updated thoughts on Permian crude takeaway in light of the MMP announcement. See the full report and charts for more.
For the second straight year, FERC tried to steal the spotlight from the NCAA on the first day of March Madness, but this year the consequences were not nearly as drastic for midstream companies. FERC opened an NOI for the ROE rate setting process for oil and gas pipeline companies. Among other questions, FERC has asked for stakeholders’ opinions on the validity of the current two-stage DCF methodology and whether or not to incorporate CAPM, risk premium, and expected earnings models. As FERC awaits feedback, investors are contemplating the possible outcomes. Could the expanded approach impact ROEs significantly? When would the proposed changes come into effect?
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