Midstream operators to report increased Q4'22 earnings

Most North American natural gas midstream operators will likely report higher EBITDA for the fourth quarter of 2022 than in the previous quarter and the year-ago quarter, and Wall Street analysts will be looking at how they plan to use the cash in 2023.

The analysts' consensus of increased EBITDA despite relatively unchanged revenue is a sign that the midstream companies have exercised spending restraint. EBITDA is a common metric for pipeline and processing plant operators because it allows earnings to be compared among companies, regardless of debts, taxes and age of physical assets.

Analysts looking past Q4'22 to full-year 2023

"We expect investors to largely look through [fourth-quarter] prints with a primary focus on '23 outlooks," UBS Securities analyst Brian Reynolds told clients before earnings season began. Investors want to see disciplined spending in the face of volatile commodity markets and interest rate increases by central banks, UBS said, but the investors will forgive spending on "energy security," which translates into spending more capital on the U.S. liquefied natural gas supply chain.

UBS anticipated that midstream operators have reduced their debts and now have room in their budgets to increase returns to shareholders through stock repurchases and dividend increases.

2022 winners likely to repeat in 2023

Investors will be particularly interested in 2023 plans for LNG terminals and the pipelines that connect to export terminals. Midstream operators with exposure to LNG will be treated favorably by investors, according to analysts at Sanford C. Bernstein & Co. "Winners of 2022 are likely to benefit again," Bernstein analysts said.

The best-performing midstream stock in 2022 was pure-play LNG terminal developer and operator Cheniere Energy Inc., but a narrowing gap between U.S. Henry Hub pricing and European pricing could shuffle the order in 2023.

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The future for global gas prices and LNG is not clear in the short term, Morgan Stanley analyst Devin McDermott warned in a note. Forecasts for global gas prices in 2023 marked a retreat from sky-high levels in the wake of Russia's invasion of Ukraine in February 2022, Morgan Stanley said. "EU LNG imports likely need to move lower to prevent overfilling storage, freeing up cargoes for rebounding Chinese demand in the Pacific Basin," the bank said.

Morgan Stanley cut its average global gas price forecast for 2023-2024 to the low $20/MMBtu range from the mid-to-high $30/MMBtu.

An index of the 10 largest midstream companies by market capitalization kept pace with the benchmark S&P 500 in the fourth quarter, and the Alerian MLP index outpaced the broader index. The Dow Jones Utility index of 15 U.S. gas and power utilities outperformed both midstream stock indexes.

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