US midstream gas sector looks for signs of market improvement after pullback

Houston — With the second-quarter 2020 earnings season having wrapped up for the US midstream sector, natural gas pipeline operators and LNG exporters are eyeing a rebound in volumes heading into 2021.

The trajectory will depend in part on how much feedgas deliveries to liquefaction terminals rise in the months ahead. The number of cargo cancellations is expected to continue to fall as prices and netbacks improve.

Pipeline operators rely on fixed fees from contracts as well as production growth upstream and exports growth downstream. Some developers have reacted to the market signals by deferring new pipeline projects, while others have either scrapped plans or face delays because of legal setbacks.

"Does the supply curve flatten or stretch out a bit more than expected?" Michael Webber, managing partner of investment research firm Webber Research & Advisory, said in an interview Aug. 12. "It's easier for us to count the number of projects proceeding close to schedule, than the other way around. US projects are restructuring and retooling. Differentiation, aside from price, will get more focus, but it still is a very long putt for greenfields."

Half of the top midstream companies saw single-digit percentage decreases in both adjusted earnings before interest, taxes, depreciation and amortization and distributable cash flow in Q2, S&P Global Market Intelligence analysis showed, while only Cheniere Energy and Enbridge saw both metrics increase.

Cheniere is bullish on LNG demand rebounding in the winter, but it is being cautious on the expansion front because of challenges in securing sufficient commercial support. LNG developer Tellurian said Aug. 12 it was deferring three of four pipelines it has proposed building in the Gulf Coast region due to the current market realities. In the Northeast, Dominion Energy in July scrapped its $8 billion Atlantic Coast Pipeline, citing legal hurdles, while EQM Midstream Partners' Mountain Valley Pipeline faces the potential for further delays due to similar hurdles.

Still, East Daley Capital Advisors Managing Director Ethan Bellamy said in an email that "the worst is behind us" in the sector after gathering and processing-focused companies "performed a lot better than feared," while Mizuho USA Securities Managing Director Gabriel Moreen agreed that "a number of boxes got checked certainly from a volumes standpoint."

Even larger companies that recorded year-over-year losses were still viewed favorably by investors because they announced spending cuts and acknowledged that the industry is entering a slower growth period.

"I think the bigger shift and kind of the pivot in terms of management messaging was on that longer-dated outlook," Tudor Pickering Holt analyst Colton Bean said in an interview. "In past years, I think [larger companies] have been reticent to guide down that run rate spend because they view that as throwing in the towel on growth and saying that they don't see opportunities."

Capital spending

One of those well-received outlooks came from Energy Transfer, which expects growth capital expenditure to be between $500 million and $700 million in 2022, a sharply lower figure than in 2020.

"Obviously that's a huge departure from where they've been the past couple of years," Bean said.

But as an era of buildout winds down, Bellamy added, not all long-haul pipeline operators are positioned to ride out what comes next.

"Long-haul liquids [pipelines] without volume commitments are poorly positioned," he said. "Operators built pipe for a growth trajectory, not a decline, so excess capacity likely will continue to suppress margins in marketing, spot barrels, and pipeline recontracting across the US."