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Commodities price rise sets stage for midstream sector gains

  • Author Dyna Mariel Bade
  • Theme Energy

Rising commodity prices have altered the playing field for the midstream space recently, and industry observers expect the impacts to show up clearly in the upcoming third-quarter earnings reports.

"We expect [third-quarter] earnings to mark the beginning of a strong [second half] with results generally improving," analysts with Credit Suisse Securities (USA) LLC said in an Oct. 18 research report. "The energy macro environment has dramatically improved and midstream companies are doing a fine job staying out of their own way."

According to analyst consensus, year-over-year growth in third-quarter adjusted EBITDA and revenues should prevail for most of the 11 major North American midstream companies analyzed by S&P Global Market Intelligence. The companies are also anticipated to mostly see quarter-over-quarter increases in adjusted EBITDA.

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Credit Suisse analysts said companies benefited from a number of tailwinds in the third quarter, including increased refined products demand, higher producer activity and ultimately high commodity prices, which is expected to be a key theme throughout earnings in the midstream space.

In particular, Cheniere Energy Inc., MPLX LP, Oneok Inc., Williams Cos. Inc., Targa Resources Corp. and DCP Midstream LP — companies that have direct commodity exposure — are forecast to post strong quarterly results, the analysts said, adding that they will also listen in for commentary on 2022 hedge books to determine potential tailwinds from commodity prices next year.

Analysts with Raymond James & Associates Inc. in an Oct. 18 note also emphasized direct and indirect commodity price tailwinds. "Regarding indirect exposure, one reason we like the set-up for midstream is that it has more visibility into at least solid 2022 results — the volume story in 2022 isn't changing all that much alongside commodity price fluctuations, so there's limited downside should [West Texas Intermediate] prices retrace," the analysts said.

Lookout for 2022 capital allocations

Market observers could also be listening for 2022 capital plans during the third-quarter earnings season. "Capital allocation decision-making will continue to be top of mind, and we get the sense that tone is shifting for a few names already," Raymond James analysts said.

Standing out in the capital allocation discussion is Targa Resources, which has a planned DevCo repurchase in the first quarter of 2022. Targa had announced plans to buy back stakes in assets owned by joint ventures with Stonepeak Partners LP going back November 2020. Investors may also pay close attention to Enterprise Products Partners LP's capital expenditure planning given its balance sheet and buyback guidance, Raymond James and Tudor Pickering & Holt Co. analysts noted separately.

In contrast, Credit Suisse analysts said they anticipate midstream companies' capex "to be much more moderated and not something we hear much about this quarter."

Moody's in an Oct. 13 global midstream outlook projected that the sector's growth capital spending will likely be muted in 2022 as exploration and production demand for new infrastructure wanes. The rating agency said midstream companies are instead likely to prioritize shareholder rewards and slashing debt to address their leverage metrics.

Ear for ESG opportunities

The anticipated reduction in capital spending comes as the regulatory and approval process for midstream projects is set to become more challenging amid the focus on climate change and the energy transition, Moody's said. In response to the energy shift, the midstream space has announced steadily increasing initiatives as well as environmental ambitions in the past months.

Analysts with Mizuho Securities USA LLC in an Oct. 5 note to clients highlighted Enterprise's announcement in early September, in which the partnership and Chevron Corp. agreed to work together to explore CO2 capture, utilization and storage opportunities in their respective U.S. Midcontinent and Gulf Coast operations.

While the announcement "lacked substance aside from a study completion timeline," the Mizuho analysts said they see it as "a necessary prelude to more meaningful involvement" in carbon capture for the midstream partnership. The analysts also commented on the potential of a hydrogen-focused project from Enterprise.

"[Enterprise] produces 100-150 MMcf/d of pure hydrogen, making it a supply aggregator for a sought-after molecule," Mizuho wrote in the note. "Being a process byproduct, the economics on an H2 project should be immediately favorable."

However, since near-term capex opportunities are now appearing slim, the analysts noted that the possibility of a near-term hydrogen project is uncertain.

Analysts with Raymond James expect renewable natural gas to gain attention during Kinder Morgan Inc.'s earnings call, which is slated to start off the reporting season for the midstream sector on Oct. 20.

Meanwhile, recent events at Enbridge Inc. — including the startup of its Line 3 pipeline replacement project, regulatory developments in its Line 5 pipeline and its ESG investor conference in late September — will "likely outweigh interest in quarterly results," Tudor Pickering analysts predicted in an Oct. 6 note.