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Major pipeline firms overcame weakened commodity prices in Q2

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Major pipeline firms overcame weakened commodity prices in Q2

Major North American midstream companies reported another round of year-over-year financial gains as slumping commodity prices loomed over smaller pipeline firms.

"The larger, more integrated names just have better results and were certainly better-received by investors," Mizuho Securities USA LLC Managing Director Gabriel Moreen said in an interview, referring to Enterprise Products Partners LP, Kinder Morgan Inc., Williams Cos. Inc., ONEOK Inc. and Energy Transfer LP. "They all have more diversified asset bases, so they can withstand lower commodity prices, particularly for natural gas and NGLs."

Many of the top midstream companies saw double-digit percentage increases in both adjusted EBITDA and distributable cash flow for the second quarter, an S&P Global Market Intelligence analysis shows. Enterprise, Energy Transfer, Williams and Plains All American Pipeline LP saw the biggest percentage upticks in adjusted EBITDA and distributable cash flow, while only Cheniere Energy Inc. and Kinder Morgan reported year-over-year losses.

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For companies focused on the Marcellus and Utica shales, however, the impacts of plummeting Appalachian shale prices and producers' plans to cut spending dominated second-quarter earnings discussions.

"There was a lot of discussion around natural gas prices and what that means for volumes out of the Northeast," BMO Capital Markets analyst Danilo Juvane said in an interview. "The whole producer austerity program was as relevant to what was going on in the Permian."

EQM Midstream Partners LP executives said they are confident that stakeholder EQT Corp.'s strategy to cut spending and growth can guide the pipeline operator through commodity price headwinds even though driller EQT, which is the master limited partnership's largest customer, has made clear that it plans to renegotiate its midstream contracts to get lower rates for gathering, processing and transportation as low gas prices persist. Antero Midstream Corp. also rejected concerns about contract renegotiation, citing solid hedges and a strong balance sheet despite the company's struggling equity value.

Still, the uncertainty surrounding how long low prices will last was something that the whole sector had to face, according to energy investment bank Tudor Pickering Holt & Co.'s Colton Bean.

"The biggest theme we saw is that people are coming to the realization that natural gas [price] weakness is not just a 2019 or 2020 consideration. You really need the second wave of LNG to kick in before you're going to have a structurally better gas market," he said. "Until you get projects like [Exxon Mobil Corp. and Qatar Petroleum's] GoldenPass or [Tellurian Inc.'s] Driftwood or Venture Global LNG's [Plaquemines] online, it's going to be a pretty tough environment for gas producers."

Stagnant stock prices were another sectorwide theme as well, particularly as more pipeline companies committed to cut spending in 2020 to move toward free cash flow.

"From stock price charts, you'd never guess that most midstreamers on average have posted good numbers. The space has been getting healthier by the quarter," Robert W. Baird & Co.'s Ethan Bellamy said in an email.

While companies' second-quarter results came in close to expectations, however, the revolving door of executive leadership was a surprise for Mizuho's Moreen.

"It certainly seems like there was a lot more management turnover over the last two months in the sector than there's been in a long time. I think that's certainly an outcome of investor frustration with the sector [and] the need for maybe more drastic action at some [companies] to de-lever," he said.

EnLink Midstream LLC announced a sudden leadership change in its Aug. 7 earnings release, and Western Midstream Partners LP replaced its CEO and COO following Occidental Petroleum Corp.'s completed merger with the MLP's sponsor.