Pipeline industry's Q2 results proved capacity for 'meaningful' investor rewards

After midstream management teams reported solid second-quarter financial results, sector experts contended that companies must start rewarding shareholders substantially as they continue to rein in spending.

"It is not enough to just do a token buyback — investors are looking for meaningful commitments," analysts at UBS told clients Aug. 6. "Case in point, investors [were] more receptive to [Crestwood Equity Partners LP versus Enterprise Products Partners LP] commitments given market cap. We continue to believe if new money isn't coming into the space, being a buyer of your own stock will help drive performance."

Mizuho Securities USA LLC managing director Gabriel Moreen agreed in an interview that "the time has come to start seriously considering returning additional capital to equity holders, whether that's distribution growth or share buybacks."

Eight of the top 10 North American midstream companies experienced percentage increases in both adjusted EBITDA and distributable cash flow during the second quarter compared with the year-ago period, according to an S&P Global Market Intelligence analysis, with Oneok Inc. recording the biggest percentage gains.

Oneok Executive Vice President and COO Kevin Burdick attributed those results to several tailwinds, including a growing gas-to-oil ratio in North Dakota's Williston Basin, ethane recovery and rising natural gas liquids raw feed throughput.

MPLX LP, which analysts at Raymond James & Associates Inc. said Aug. 4 is "maybe the only midstream [company] ... buying back its equity at a pace that investors like," also saw a double-digit percentage increase in both metrics, as did Plains All American Pipeline LP and Magellan Midstream Partners LP.

Magellan in June agreed to sell its independent terminals network, located mainly in the Southeastern U.S., to Buckeye Partners LP for $435 million, while Plains' June announcement that it plans to combine Permian Basin assets, operations and commercial activities under a joint venture with Oryx Midstream Holdings LLC drew positive reactions from industry analysts.

When it came to investing in growth projects like renewable fuels infrastructure, energy investment bank Tudor Pickering Holt & Co.'s Colton Bean said management teams successfully dispelled capex "creep" fears.

"Firm energy transition investments remain limited in scope, though first indications of more material capital commitments for the 2022 to 2023 time frame emerged," Bean noted in an email.

CBRE Clarion securities portfolio manager Hinds Howard added that some investors remain "cautious on the ability for midstream operators to beat out competition in those areas and make returns that justify the investments."

Executives at both EnLink Midstream LLC and DCP Midstream LP said during recent earnings conference calls that their companies are focusing on opportunities to corner the market for carbon capture, utilization and sequestration, but did not commit specific dollar amounts to those initiatives.

Other firms like Kinder Morgan Inc. and Tallgrass Energy LP are buying whole and minority stakes in existing renewable fuels facilities.