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Midstream earnings season expected to show emerging stability with oil off lows

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Midstream earnings season expected to show emerging stability with oil off lows

With higher crude oil prices restoring some investor confidence in the midstream energy sector, a number of industry experts expect third-quarter earnings to reflect a stabilizing financial environment as pipeline operators are still learning to operate within their means.

The price of West Texas Intermediate crude oil increased by 12% during the third quarter to finish at $51.67 on Sept. 29, but the bellwether Alerian Master Limited Partnership Index, which tracks a basket of the largest midstream MLPs, had a 4.8% decrease over the quarter as equity overhangs, leverage and costly distributions continue to strain balance sheets. Still, the sector is slowly easing out of a "maintenance quarter," and third-quarter results should show what MUFG Securities Americas Inc.'s Barrett Blaschke called an inflection point.

"I'm hearing a little more rumbling on the institutional side with people getting more interested in the energy space again," Blaschke said in an interview. "I don't think you’re going to get a surprise upside out of [earnings], but I do think you will see stabilization. People are more confident that the earnings are going to be there."

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S&P Global Market Intelligence estimates anticipate varying third-quarter results in the sector, with giants like Kinder Morgan Inc. and Williams Cos. Inc. projected to report decreased revenues and EBITDA and others including Enterprise Products Partners LP and ONEOK Inc. expected to improve those metrics.

Kinder Morgan will kick off third-quarter midstream earnings season Oct. 18, with the sector's top companies and partnerships reporting results through Nov. 7.

Despite the prospect of mostly better financials, Gibson Dunn & Crutcher LLP attorney Hillary Holmes told S&P Global that the industry is still wary of fluctuating commodity prices. "No investment banker or board member I talked to is taking for granted the fact that oil is right around $50 [per barrel]," she said. "I don't think anyone's preparing for $20 again, but they certainly are recognizing the fact that we could wake up three weeks from now and be at $40 again."

The sector is also taking in stride the minimal damage to Gulf Coast infrastructure from Hurricane Harvey. "Nobody … has had a really big impact on the midstream side. The maximum I’m hearing is in the $10 million range," Blaschke noted.

Still, the third quarter marked a desire by some midstream MLPs to transition back to growth mode. Kinder Morgan in July announced plans to ramp up its annual dividend through 2020, while debt and equity issuances spiked in September alongside an uptick in initial public offering registrations.

Private equity deals like Energy Transfer Partners LP's sale of a $1.57 billion stake in Rover Pipeline LLC to funds managed by Blackstone Energy Partners and Blackstone Capital Partners also contributed to a third-quarter trend that went beyond traditional acquisitions.

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"These transactions have transcended midstream assets and companies to include the acquisition of infrastructure-oriented investment fund managers Harvest Fund Advisors LLC by [Blackstone Group LP] [and] Center Coast Capital Holdings LLC by [Brookfield Asset Management Inc.'s] Public Securities Group," Jefferies LLC analysts wrote in an Oct. 16 note to clients.

In a separate Oct. 16 research note, Jefferies analysts added that more M&A activity is likely for the midstream sector as long as commodity price risk decreases and corporate structure consolidations continue. They flagged Enterprise, ONEOK and MPLX LP as potential acquirers, while Williams, Targa Resources Corp. and Plains All American Pipeline LP were listed as possible targets.

Plains' weak second-quarter results led the partnership to slash its distribution and prompted Moody's to lower Plains' credit to junk status, but its "premier asset base" in the Permian Basin could make it attractive to prospective buyers, according to Jefferies.