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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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.
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.
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.
We’re hearing a more cautious tone on the group overall after a strong start to the year. Q4 earnings were mixed and mega project risks are front and center on investors’ minds. The C-corps keep outperforming the MLPs and most dedicated midstream investors aren’t sure why. Perhaps we’re seeing new generalist buyers? We’re also hearing consistent debates on a number of key stocks from investors. Please open the full report for details.
Attractive valuation, but with late cycle multiple compression risks. Midstream stocks offer low double digit total return (dividend + growth), which is attractive at this point in the cycle especially for a relatively low risk business. Relative EV/EBITDA multiples are slightly below the SPX and UTY, and P/E is now in line with the market. We saw a 10-20% compression of EBITDA and cash flow multiples in 2018. The risk is market multiple compression in 2019, which has an amplified effect on equity values for a levered sector.
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