North American gas midstream sector outlook in focus as Q3 earnings reports begin

Market observers will be closely watching the outlook for demand and growth spending heading into 2021 as North American operators of natural gas pipelines, processing facilities and liquefaction terminals release third-quarter financial results.

Rising coronavirus infection rates in the US have added uncertainty over the depth and resilience of a rebound in volumes. And while prices in Europe and Asia have recently been incentivizing a pickup in activity at LNG terminals, how that picture looks after the peak winter heating season remains in flux.

Kinder Morgan, which moves more than a third of the gas consumed in the US, is scheduled to kick off the reporting season for the midstream sector Oct. 21. Over the three weeks that follow, Enterprise Products Partners, Energy Transfer, Cheniere Energy, Sempra Energy, Dominion Energy, Williams and Canada's TC Energy will also be reporting their latest financial results.

"New assets being placed into service over the next few years could mitigate the headwinds the sector faces from the weak economic outlook and challenges that the oil and gas industry face, in our view," TD Securities said in a note to clients Oct. 20.

"Over the longer time horizon, we believe that the WCSB (Western Canadian Sedimentary Basin) remains economically competitive in North America, which, in turn, is competitive globally, and when coupled with a recovery in demand as the pandemic is resolved should provide a pathway to recovery for midstream names."

According to analyst consensus, the 11 major North American pipeline companies analyzed by S&P Global Market Intelligence should mostly record year-over-year losses in both adjusted EBITDA and revenues for the July-September quarter. Only Oneok and Canada's Pembina Pipeline are expected to see both metrics increase, and MPLX is anticipated to report no changes.

Even though industry analysts predict that the Nov. 3 US elections will overshadow midstream results, they are still looking for management teams to announce more budget cuts and pivot toward buying back stock once Kinder Morgan, which is often viewed as a barometer for the sector, releases its results.

While many pipeline firms have already slashed balance sheets and investor payouts during the pandemic, analysts at UBS said there is still ample room for improvement.

"We ... expect the discussion to be more amplified during earnings calls with signaling of more cuts to come in the 2021 budgeting process," they said in a note to clients Oct. 9. "Those willing to put out big targets will likely be rewarded while those that suggest a no-layoff culture may lag."

When it comes to further trimming dividends, energy investment bank Tudor Pickering Holt & Co.'s Colton Bean and Scotiabank's Alonso Guerra-Garcia are eyeing Oneok and Energy Transfer, where Kelcy Warren recently stepped down as CEO, they said in interviews.

With polls hinting at the White House potentially shifting to a Democratic administration in 2021 under former Vice President Joe Biden, the pipeline sector's response to the renewable energy transition will also be under a microscope.

Williams has already committed to investing in new solar installations and renewable natural gas projects and Kinder Morgan is exploring transporting hydrogen through its gas pipeline system.

"We may not see all of the large-caps allocate any money, but we would at least expect them to talk about what they are doing in terms of power usage and emissions," Bean said.

The recent pickup in US LNG activity offers some optimism for the midstream, particularly pipeline operators that rely on robust feedgas volumes.

Feedgas deliveries to US liquefaction terminals on Oct. 20 hit 8.52 Bcf/d, the highest level in six months, as the Platts JKM -- the benchmark for spot LNG prices in Northeast Asia -- rallied to a one-year high of $6.613/MMBtu. That's up more than threefold from its historic low on April 28 at $1.825/MMBtu.

Supply disruptions

The ramp-up follows weak demand during the summer and several rounds of supply disruptions since August due to hurricanes.

Laura and Delta caused supply disruptions for exports from Sempra's Cameron LNG and Cheniere's Sabine Pass, both in Louisiana. A fire affecting Sabine Pass Train 1 on Oct. 11 along with a sunk semi submersible rig in the shipping channel that serves Sabine Pass has restricted tanker movements. A barge sunk in the channel that serves Cameron LNG also led to draft restrictions there.

There is more room for US feedgas growth as those restrictions ease.