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Pipeline firms' Q1 earnings take a backseat to spending, dividend cuts


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Pipeline firms' Q1 earnings take a backseat to spending, dividend cuts

Investors are unlikely to pay much attention to midstream energy companies' first-quarter financial results, focusing instead on the bleak longer-term outlook underway as the COVID-19 pandemic destroys demand for crude oil and refined products.

Many oil and gas pipeline firms have already slashed spending and distributions to protect their balance sheets from collapsing crude prices. Midstream stock prices during the first quarter crashed alongside a 66% drop in the price of West Texas Intermediate crude and on April 20, WTI futures on the New York Mercantile Exchange turned negative for the first time ever as storage runs out.

Heavyweights like Energy Transfer LP and Enterprise Products Partners LP, however, have not yet announced any specific measures for mitigating lower 2020 revenues, especially when it comes to customers' credit health.

"We expect to focus on how steep and mean the slope ahead for 2020 and 2021 will be," Robert W. Baird & Co. analyst Ethan Bellamy wrote in an email. "Management teams better show up prepared. In particular, granularity about customer exposure, management teams sharing the pain of their employees with compensation reductions, and a realistic assessment of liquidity will be needed, at a minimum."

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Energy investment bank Tudor Pickering Holt & Co.'s Colton Bean agreed in an email that "most of the focus should be on guidance updates and further reductions to dividends and capital" as opposed to the first-quarter numbers themselves, which Jefferies analysts expect "will represent a high water mark for 2020" for oil-focused companies.

According to analyst consensus, the 11 major North American pipeline companies analyzed by S&P Global Market Intelligence should yield choppy results, with several projected to record year-over-year losses in both adjusted EBITDA and revenues. Only ONEOK Inc. is expected to see both metrics increase, but analysts at UBS told clients April 19 that it "will likely need to defend its flat dividend announcement, cut capex further and potentially discuss some [operations and maintenance/selling, general and administrative] reduction initiatives."

While Kinder Morgan Inc. missed the analyst consensus when it kicked off the reporting period on April 22, analysts at Mizuho were still pleased by the gas pipeline giant's 5% dividend increase and $800 million in 2020 budget cuts.

"Although revised 2020 [Kinder Morgan] guidance came in lower than we and consensus expected, we believe ... capital flexibility is better than we expected and the balance sheet should not deteriorate materially in the current down cycle," they wrote in an April 23 note to clients. "The larger picture remains one of [Kinder Morgan] being defensive enough to preserve (and modestly grow) its dividend."

When it comes to the anticipated wave of producer bankruptcies, Kinder Morgan CEO Steven Kean said counterparty credit defaults are top of mind for the midstream company.

"In our Monday meetings, it's the second topic we cover," he said during Kinder Morgan's April 22 conference call. "Now there's no good analogy to the current year … but if we look at something that was similar in terms of impact on the producer segment and we go back to 2016, our bankruptcy defaults in 2016 amounted to about $10 million. It's also a little bit difficult to call your shots on who you think is going to tip over or not tip over."

That could trickle down into some smaller pipeline firms unable to avoid bankruptcy through balance sheet conservation and even more drastic actions like corporate simplification and consolidation.

"There will be pain and insolvencies," Simpson Thacher & Bartlett LLP attorney Robert Rabalais said in a recent interview. "It's going to be a death spiral ... if you're over-levered and your assets are specific to a producer or basin."