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North American midstream natural gas sector sees bumpy market road ahead

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North American midstream natural gas sector sees bumpy market road ahead

Highlights

Q1 earnings and outlook cited crude plunge

Spending cuts and project delays abound

Houston — The North American natural gas midstream sector faces lower interstate pipeline volumes, spending cuts and project deferrals, after first-quarter results exposed the depth of the market impact from the coronavirus pandemic.

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Plunging crude prices have resulted in drillers cutting back on oil production, which in turn results in reduced associated gas output, affecting pipeline flows.

Refined products volumes also have been affected, lowering throughput on common carrier pipelines operated by major midstream companies. One of those operators, Kinder Morgan, is cutting 2020 spending on expansion projects and contributions to joint ventures by $700 million. Spending, job cuts or project investment decision delays were also announced as the first quarter wrapped up by DCP Midstream, Energy Transfer, Sempra Energy, Tellurian and Canada's Pembina.

Podcast: Market stress leads to dim near-term outlook across North American midstream gas sector

"We track dozens of large scale projects in great detail – and nearly everything is slipping, even if the project owners aren't admitting it yet," Michael Webber, managing partner of investment research firm Webber Research & Advisory, said Friday.

Most of the top midstream companies saw single-digit percentage decrease in both adjusted EBITDA and distributable cash flow for the first quarter of 2020, an S&P Global Market Intelligence analysis showed. Analysts and investors, however, were more focused on guidance for the second quarter and beyond when the effect of low oil prices will really show up.

"The results themselves didn't really matter in the eyes of investors," Raymond James & Associates analyst Justin Jenkins said in an interview. "I think most investors are trying to look a bit further forward than is typically the case with energy."

Some major gas infrastructure is going forward but could see delays, depending on market factors and regulatory and legal concerns.

Dominion Energy officials maintained during a recent investor call the company's early 2022 startup target and estimated $8 billion price tag for its Atlantic Coast Pipeline, while acknowledging that multiple legal hurdles need to be overcome within the next several months. The ability to cut trees next winter along the pipeline route is critical to preventing a further delay of the US Northeast natural gas project.

The market disruption isn't treating everyone equally. Some midstream companies are benefiting from collapsing oil prices, including Enterprise Products Partners and Plains All American Pipeline.

"Chaos leads to inefficient markets, which leads to volatility. We don't fear volatility. We embrace it, and inefficient markets work to our strength," Enterprise co-CEO Jim Teague said April 29. "Our storage, it's worth its weight in gold, as there is contango on every hydrocarbon."

Still, Jenkins said some companies may need to cut capital growth spending more in the coming months even though operational cost cuts exceeded expectations.

"There's more work to do ... but it seems we're making progress in midstream by and large in adjusting to the reality of the new world," he said.

One thing that was not as clear, according to Mizuho Securities USA analyst Gabriel Moreen, was how much oil production will be lost to shut-ins versus organic decline.

"I think the cadence of trying to differentiate ... is something that both management [teams] and the market are still trying to figure out," he said in an interview.

Key financial metrics for top midstream companies

Company
Q1'19 adj. EBITDA ($M)
Q1'20 adj. EBITDA ($M)
Change
Q1'19 DCF ($M)
Q1'20 DCF ($M)
Change
Enbridge Inc.*
3,769.0
3,763.0
-0.2%
2,758.0
2,706.0
-1.9%
Enterprise Products Partners LP
1,986.0
1,979.0
-0.4%
1,628.0
1,554.0
-4.5%
Kinder Morgan Inc.**
1,947.0
1,848.0
-5.1%
1,371.0
1,261.0
-8.0%
Williams Cos. Inc.
1,216.0
1,262.0
3.8%
780.0
861.0
10.4%
Energy Transfer LP***
2,735.0
2,635.0
-3.7%
1,594.0
1,417.0
-11.1%
MPLX LP****
1,263.0
1,294.0
2.5%
1,021.0
1,078.0
5.6%
Oneok Inc.
637.5
700.8
9.9%
506.8
522.3
3.1%
Cheniere Energy Inc.
650.0
1,039.0
59.8%
200.0
250.0
25.0%
Magellan Midstream Partners LP
386.4
380.5
-1.5%
318.0
306.5
-3.6%
Plains All American Pipeline LP
862.0
795.0
-7.8%
654.0
596.0
-8.9%
As of May 13, 2020.
*Canadian dollars
**Kinder Morgan Inc. Q1'19 figures include contributions from Kinder Morgan Canada Ltd. and the U.S. portion of the Cochin pipeline, which Pembina Pipeline Corp. acquired Dec. 16, 2019.
***Energy Transfer Q1'20 figures represent consolidated earnings of Energy Transfer and SemGroup Corp., which merged on Dec. 5, 2019.
****MPLX LP figures represent consolidated earnings of MPLX and Andeavor Logistics LP, which merged on July 30, 2019.
Sources: S&P Global Market Intelligence; company reports