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Permian seen as land of opportunity for US gas midstream sector as Q2 earnings season nears

Houston — Midstream operators are preparing to release financial results for the second quarter as a flurry of oil drilling activity in the Permian Basin creates the need for more pipelines to move associated gas production.

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The industry dynamics reflect a focus on Texas as a land of opportunity following an infrastructure build-out in the US Northeast, where significant takeaway capacity is now coming online or will in the near term but prospects for future projects face challenges from environmental opposition.

Kinder Morgan, which is scheduled to kick off the sector's earnings reporting season on Wednesday, has proposed two gas pipelines to serve the Permian with a combined capacity of up to 4 Bcf/d. The efforts are part of an all-in gas strategy for the Houston-based company, which already transports more than one-third of the gas consumed in the US. Some analysts are suggesting that even more could be done in the Permian.

"As any energy investor now knows, we are tight pipeline capacity out of the Permian for crude and gas," Sanford C. Bernstein & Co. analyst Jean Ann Salisbury said in a July 11 research note to clients. "We believe Kinder Morgan and Williams are best positioned as they provide options to continue east to Louisiana."

Investors will get a glimpse of pipeline companies' growth plans when they release their results for the April-June quarter over the next several weeks. Besides Kinder Morgan, EQT Midstream Partners is scheduled to report its results on July 26, followed by Williams, Dominion Energy and Enterprise Products Partners on August 1 and TransCanada, Pembina Pipeline and Enbridge on August 2.

The market also will be looking to hear about efforts by some companies to overhaul their corporate structures to stem the impact of a US Federal Energy Regulatory Commission tax policy decision in March. Midstream companies organized as master limited partnerships are affected. Since the decision, both Williams and Enbridge have announced simplification plans, while Dominion and Energy Transfer Partners have said they are weighing structure changes. For its part, Kinder Morgan is making a big bet on the Permian, a prolific production basin that spans West Texas and southeastern New Mexico.

Last month, it announced, along with producer Apache and private equity-backed EagleClaw Midstream Ventures, the Permian Highway Pipeline project. The $2 billion pipeline will be designed to transport up to 2 Bcf/d of natural gas through 430 miles of 42-inch diameter pipeline from the Waha, Texas, area to the Gulf Coast and Mexico markets. Kinder said that due to producer interest it also was evaluating the feasibility of a 48-inch diameter pipeline with increased capacity.

The announcement of that project, which is expected to be in service in late 2020, followed a final investment decision in December 2017 to proceed with the 1.98 Bcf/d Gulf Coast Express pipeline. That project, which is targeted to start up by October 2019 and also will allow more gas to move from the Permian to the Texas Gulf Coast, is being jointly developed by Kinder Morgan, DCP Midstream and Targa Resources.


Salisbury, in the Bernstein note, said that what is happening in the oil patch in the Permian will continue to drive what happens in the gas sector, particularly on the midstream side,

"A flurry of sanctioning activity for crude pipelines will add 3.2 million b/d by 2021, with more potential expansions on top of that," Salisbury said. "Investors have wondered - if these pipes fill, what does it imply for our needs for gas and NGL pipes?" --Harry Weber,

--Edited by Richard Rubin,