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NGL bottlenecks are expected to spur earnings gains across big pipeline firms


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NGL bottlenecks are expected to spur earnings gains across big pipeline firms

Third-quarter earnings for the oil and gas pipeline sector are expected to show year-over-year financial gains as NGL infrastructure constraints push commodity prices higher and well-positioned midstream companies can reap a windfall.

Unprocessed supplies are stuck in the Permian Basin in West Texas and New Mexico and at the Mont Belvieu, Texas, fractionation hub as a gas liquids mix edges out so-called purity products such as ethane amid heightened demand from new petrochemical plants on the Gulf Coast. The bottlenecks have caused the spread to grow between Mont Belvieu and the Conway, Kan., hub in the Midcontinent, where some volumes are also stranded.

Kinder Morgan Inc. will kick off the midstream earnings season after the market closes Oct. 17. The S&P Global Market Intelligence consensus third-quarter EBITDA estimate for the company as of Oct. 16 was $1.86 billion on projected revenue of $3.57 billion, which would represent increases over prior-year results.

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All of the other 10 major North American pipeline companies S&P Global Market Intelligence surveyed should also see EBITDA and revenue rise year over year, according to analyst consensus. Henry Hoffman, a partner at energy-focused investment firm SL Advisors LLC, said in an interview that he expects Oneok Inc., Enterprise Products Partners LP and Targa Resources Corp. to do particularly well because of their exposure to the Gulf Coast NGL supply chain.

In an Oct. 15 note to clients, analysts at energy investment bank Tudor Pickering Holt & Co. said they see NGL price spikes as a "kicker for medium-term earnings." Midstream analysts at Barclays said the spreads at Mont Belvieu will not revert back for at least another year.

"The NGL market finds itself in uncharted territory as overall economics are being driven off of tight [fractionation] and transportation capacity," they wrote in an Oct. 12 note to clients. "We are inclined to think that the [~60,000-barrel-per-day] expansion of [the Sterling III pipeline] and the addition of [240,000 bbl/d] of fractionation capacity in the first half of next year will alleviate the spread a bit, although it likely won't collapse to more normalized levels until [Oneok's] Arbuckle II [pipeline] expansion comes online in 1Q20."

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The midstream sector's anticipated performance is also based on higher stock prices. The bellwether Alerian Master Limited Partnership Index gained 6.6% on a total-return basis, which includes distribution income, during the third quarter.

The price of West Texas Intermediate crude oil, meanwhile, slipped 1.2% during the three months to settle at $73.25 per barrel Sept. 28, but that short-term loss did not concern Robert W. Baird & Co. Inc. midstream energy analyst Ethan Bellamy. "Oil prices are climbing. Oil is the uber-variable that drives all energy markets," he said.

Industry analysts will also keep a focus on pipeline master limited partnerships that continue to funnel funds to their general partners, including Phillips 66 Partners LP and Valero Energy Partners LP. Those payments, known as incentive distribution rights, can total 50% of the partnership's incremental quarterly cash distributions and can take a heavy toll on stock values.

"With recent incentive eliminations via merger at [Energy Transfer Partners LP] and [Antero Midstream Partners LP], the laggards that have yet to purge these carried interest provisions should come under increased pressure to follow their peers," Bellamy said.

Shareholders will vote Oct. 18 on Energy Transfer Equity LP's $26.55 billion stock deal to buy out Energy Transfer Partners, while Antero Midstream's combination with Antero Midstream GP LP is scheduled to close during the first quarter of 2019.