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Updates expected on growth projects, debt as midstream giants put Q2 in rearview

Big growthprojects, leverage reductions and access to capital are on midstream energy analysts'radar for second-quarter earnings season as the hard-hit industry rebalances.

"Lookingacross the entire sector, we are most interested in indications of how our companiesare progressing on growth projects, current views on global ethane and LPG [liquefiedpetroleum gas] export market potential, and the potential headwind to long-termgrowth from overbuilt midstream capacity," Sanford C. Bernstein & Co. LLCanalysts Jean Ann Salisbury, Samuel Shrank and Jackson Kulas said in a July 20 notepreviewing earnings.

The Bernsteintrio noted that the biggest risks include lower commodity prices, depressed commodityvolumes, regulatory bottlenecks for new pipeline construction and over-capacity,which could hinder midstream operators' efforts to recoup their initial projectinvestments.

Salisburyand her colleagues are upbeat about EnterpriseProducts Partners LP despite a decline in some of its crude oil andgas pipeline businesses. "The big upside story for 2016 for Enterprise continuesto be around exports, particularly LPG and ethane, as well as potential processinguplift from higher ethane prices next year," they wrote.

, which alreadyreported its second-quarter earnings, could set an example for operators lookingto reduce leverage. The company's chairman and co-founder, Richard Kinder, an intent to get debt-to-EBITDAdown to 5.3x by year-end through joint ventures and asset sales. At the end of thequarter, KMI was at 5.6x. The company reported second-quarter net income availableto common stockholders of $333 million, or 15 cents per share, unchanged from theyear-ago period, while distributable cash flow tightened. The S&P Capital IQconsensus normalized EPS estimate for the most recent quarter was also 15 cents.

JefferiesLLC analysts, whose midstream outlook was more bearish overall, expect to focus on itssecond-quarter operational performance and stand-alone initiatives.

"Followingthe termination of the [Energy TransferEquity LP] merger, 2Q will mark the first quarter we would expect managementto articulate standalone objectives at Williams," the analysts wrote July 25.They are looking for updates on maintaining WilliamsPartners LP's investment-grade credit rating, Transcontinental Gas Pipe Line Co. LLC's Atlantic Sunriseproject and leverage targets, among other issues.

Leveragereduction will also be a key area of focus for Plains All American Pipeline LP and Sunoco LP, while rating agency concerns and base businesshealth will be on ETE's radar, Deutsche Bank MLP analyst Kristina Kazarian saidin a July 20 note. "We think Energy Transfer's release and conference callare probably the most-anticipated of this earnings season," she wrote.

DeutscheBank and Bernstein analysts additionally cited an expectation of more clarity onETE's dividend implications and financing plans for its growth backlog.

Kazariansaid investors will be less concerned about volume and coverage challenges "asthe sector-wide restructuring is almost complete."

However,Raymond James Financial Inc. analyst Tom Murphy said volumes will remain a marketconcern. "Companies' volume exposure in various basins and what's going onthere as production declines, and what they're exposed to, are general questionsanalysts will ask," he said in an interview.

"Withthe reopening of capitalmarkets, partnerships will plan to issue equity going forward. On the debt marketsside, too, interest rates are pretty low," he added.

In aJuly 19 industry brief, Murphy and other Raymond James analysts noted a growingoptimism about a "positive shift in the fundamentals across the midstream/MLPgroup" since February lows. "In the near term, we see this trend continuingdue to improving North American energy fundamentals," they said in the brief,citing expectations of more thoughtful growth CapEx spending, more diverse capitalsourcing and a more confident pricing and production outlook for oil, gas and NGLs.