Analysis: US gas midstream sector earnings to be released amid coronavirus resurgence

The US natural gas market will see how deeply the demand drop caused by the coronavirus pandemic has affected the midstream sector when operators of pipelines and processing facilities release their financial results for the second quarter.

The virus impact first peaked in the US during the April-June period, with feedgas deliveries to Gulf Coast liquefaction terminals falling dramatically amid widespread cargo cancellations. That has meant lower volumes on some pipelines, and has trickled upstream to shale producers.

Kinder Morgan, which in addition to moving more than a third of the gas consumed in the US also relies on fixed fees from throughput of crude and refined products on its common carrier pipelines, kicks off the earnings reporting season July 22. How it fared and its outlook for the rest of the year will be a barometer for the sector's performance. Kinder Morgan operates the Gulf Coast Express gas pipeline in the Permian and is building the Permian Highway Pipeline, which is slated to start up in early 2021.

"While some capital could choose to exit the sector entirely, we believe there is still a meaningful level of capital that would like to selectively remain given mandates, desire for income, or tax basis considerations," Morgan Stanley said in a note to clients July 15.

In anticipation of a reckoning, many operators cut their growth spending budgets. Dominion Energy recently said it was offloading substantially all of its gas pipeline, related infrastructure and storage assets to Warren Buffett's Berkshire Hathaway, while also cancelling the $8 billion Atlantic Coast Pipeline that it was building with Duke Energy. Dominion will release its second-quarter financial results July 31.

What happens in the midstream sector has increasingly been tied to growth in output at the six major US LNG export facilities, four of which are located on the Gulf Coast. Amid the pandemic, utilization at those facilities has plunged, based on feedgas levels that recently hit a 17-month low. At least 130 cargoes that were scheduled to be loaded at US LNG terminals between April and August were canceled, according to an S&P Global Platts tally. Details on September cancellations will begin to trickle out around July 20.

Multiple liquefaction terminal developers, meanwhile, have announced delays of project final investment decisions or stopped providing updates on target dates for making a decision. Cheniere Energy, the biggest US LNG exporter, is scheduled to release its results for the April-June quarter on Aug. 6.

The outlook will be an important factor for market participants and investors. Global gas prices finally found a bottom over the last 30 days, but are likely to remain near this low point through the end of the third quarter, as high storage stocks and a lack of demand growth remain major concerns until seasonal demand begins to perk up in mid-October, according to Platts Analytics data.

The lingering threat of another demand loss tied to additional coronavirus outbreaks remains a concern throughout most of the world. Virus infections and deaths started to increase again in recent weeks in the US. The prospect of further shutdowns is likely to be top of mind for pipeline operators as well, as they release their second-quarter results.

"With 2Q expected – or at least hoped – to define the trough for midstream earnings, results will offer a view into downside variability from COVID-19/OPEC+ shocks and initial visibility on a recovery path," Morgan Stanley said.