Few changes expected on midstream oil, gas calls after stocks underwhelmed in Q1

Midstream oil and gas companies were expected to describe modest and mixed financial performance for the first quarter after a hefty drop in natural gas prices.

Energy industry analysts expected six of the 11 large midstream operators selected by S&P Global Market Intelligence to show EBITDA growth compared to the first quarter of 2022, while the remaining five will show a drop in EBITDA.

As a group, the stocks of large midstream companies underperformed the S&P 500 and other industry indexes in the first quarter as investors walked away from an oversupplied gas market.

Midstream waits on upstream production cuts

While most pipelines and processors in the group have little exposure to commodity pricing, any drop in natural gas activity filters down to the midstream sector as less revenue.

"The focus will be on the impact to the forward outlook for volumes after the collapse of natural gas prices," said Hinds Howard, midstream analyst and CBRE Investment Management portfolio manager.

Upstream customers are expected to announce activity cuts on their first-quarter calls over the next three weeks, analysts said.

Benchmark Henry Hub gas futures prices have languished below $3/MMBtu since January, a sharp decline from a price of more than $9/MMBtu in August 2022, driving expectations of a slowdown among gas producers that so far have been reluctant to respond.

"Most of our midstream companies pay a notable baseline/quarterly dividend that we anticipate will be unchanged," Truist Securities Inc. oil and gas analyst Neal Dingmann told clients April 19. "In addition to the quarterly dividends, most companies plan to continue paying down debt toward their stated goals. Unlike our upstream group, we anticipate minimal additional shareholder return such as buybacks or special dividends."

Oil-focused midstream companies beat gas-focused ones

Among individual stocks, oil-weighted operators such as Magellan Midstream Partners LP and Enterprise Products Partners LP kept pace with the S&P 500. Operators with a natural gas focus, such as Williams Cos. Inc. and Kinder Morgan Inc., trailed the broader index.

Raymond James midstream analysts Justin Jenkins and J.R. Weston anticipated a quiet quarter as midstream companies adjusted to lower natural gas prices. "We're not making many large changes to our estimates or predicting too many far out of consensus 1Q outcomes," they told clients April 20.

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