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Infrastructure reliability defined US midstream gas sector's results in Q1

Highlights

Texas winter storm pitted prepared against unprepared

Energy transition a frequent topic in fossil fuel C-suite

Houston — The January-March quarter pitted the prepared against the unprepared as operators of US pipelines and liquefaction terminals that were able to deliver supplies during the February freeze in Texas were rewarded with strong profits, while those that had difficulty were burdened by higher costs and lower revenue.

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The mixed results come as overall volumes continue to recover a year after the worst impacts from the coronavirus pandemic.

Strong feedgas demand from LNG export terminals was a bright spot in the first quarter, and remains so heading into the summer, though overall pipeline gas transportation volumes declined or were flat for some of the major operators. Production in the Appalachian Basin in the Northeast and the Permian Basin in Texas and New Mexico will be key going forward.

"Enthusiasm seems to be growing for a production rebound later in the year, but mostly expected to spill into 2022," Sanford C. Bernstein & Co. analyst Jean Ann Salisbury said in a recent note to clients.

Most of the top 10 midstream companies in an S&P Global Market Intelligence analysis experienced percentage increases in both adjusted EBITDA and distributable cash flow during the first quarter compared with the year-ago period, with Energy Transfer's massive gains in the lead.

"We had a feeling that a few names ... where base case for a lot of folks was a negative impact ended up reporting a surprise upside impact," Credit Suisse analyst Spiro Dounis said in an interview.

The extreme weather event had a $2.4 billion positive impact alone on Energy Transfer, which saw its adjusted EBITDA jump over 90% during the quarter.

"The industry and the country, I think, has recognized how ... big-inch pipe that can deliver large volumes to power plants into cities and [local distribution companies] and that can bring gas out of storage is really invaluable. Those assets have been way undervalued for the last, in our opinion, five, six, seven years," co-CEO Marshall McCrea said May 6.

Kinder Morgan recorded a $1 billion windfall from the storm. The company's performance in February, according to CEO Steven Kean, has led to "more long-term firm capacity sales and some associated capital investments that will help our customers to be even better positioned for future extreme weather."

Colton Bean, an analyst at energy investment bank Tudor Pickering Holt & Co., said observers did not expect Kinder Morgan's results.

"I think we were surprised by the magnitude of the upside impacts," he said about first-quarter financial performance across the sector.

On the flip side, Enterprise Products Partners, which operates pipelines, processing plants and export and storage facilities that serve the natural gas, NGLs, crude oil and petrochemical sectors, reported a slightly lower Q1 profit due in part to higher costs and disruptions at its facilities during the Texas freeze disaster.

Total natural gas transportation volumes slid to 13.7 TBtus/d for Q1 2021 from 13.9 TBtus/d during the same period a year earlier, Enterprise said. The company's Texas Intrastate natural gas pipeline, natural gas processing plants and storage facilities were impacted by rolling blackouts during the Texas freeze. Lost revenue from these disruptions, higher power and natural gas costs, as well as losses on natural gas hedges, were mitigated by sales of natural gas to electricity generators, natural gas utilities and industrial customers to assist them in meeting their needs, Enterprise said.

Energy transition

When it came to management teams' discussions, Bean said the energy transition "is still taking up 50% of these calls" even though executives are not forthcoming with details about specific investments.

The major change for the recent reporting period, he noted, was the "big uptick" in commentary on carbon capture, utilization and sequestration thanks in part to extended Section 45Q tax credits offered to industrial manufacturers that capture carbon emissions and either store them permanently or put them to use in applications that reduce life cycle emissions.

Energy Transfer is developing a carbon capture project related to its Marcus Hook liquids terminal in Pennsylvania, while Enbridge said adding CCUS to its growing list of renewable fuels businesses could be the Canadian heavyweight's "biggest opportunity" on the energy transition front.