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US ELECTIONS: Crude midstream sector eyes pending projects ahead of Q3 results

Highlights

Election may determine fate of Keystone XL, other projects

Impact on Corps of Engineers leadership

Consolidation, distribution cuts seem likely

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Third-quarter earnings for US crude midstream firms should improve a bit from the spring, but market watchers likely will be more focused on the US presidential election that could help determine an upstream production recovery as well as the fate of several pipeline projects.

The Nov. 3 elections fall in the middle of the energy sector's earnings season and either a Republican or Democratic presidency in 2021 could contribute to the success or demise of long-pending projects, including the Keystone XL pipeline, or even the fate of existing systems, such as much-litigated Dakota Access Pipeline.

A White House under Democratic nominee Joe Biden presidency could hasten the energy transition, trigger more industry consolidation, and also contribute to higher oil prices in a smaller, but potentially healthier industry, energy analysts said. That said, pipeline builders certainly favor President Donald Trump over Biden because they don't want more pressure added to a midstream sector already weighed down by regulations and lawsuits.

"There may be a distinct difference between calls that happen before the election and calls that happen after, assuming we have the results," said Stacey Morris, research director at Alerian. "It could be more interesting to hear the commentary after Nov. 3."

That said, "So much is in the courts these days, the president can only do so much."

Some of the railroad companies report their earnings as soon as Oct. 16, but the midstream sector doesn't really get started in earnest until Kinder Morgan reports on Oct. 21 and many other leading firms don't take their turns until well into November.

The 2020 oil bust bottomed out in the second quarter, so the crude oil volumes and profits should show some gains since June, Morris said.

But this remains a very challenged sector with pipeline capacity outpacing crude volumes in most of North America for at least a few years. Permian Basin pipeline capacity, for instance, is expected to outpace production by at least 4 million b/d at the end of 2021, according to S&P Global Platts Analytics.

"We're past that large, massive build out of pipelines," Morris said. "And the demand recovery has kind of hit a rough patch in terms of stalling."

PROJECTS FACE DEFERRALS, COURT BATTLES

Midstream bellwether Enterprise Products Partners in September already canceled its 450,000 b/d Midland-to-ECHO 4 crude oil pipeline project, citing the pandemic and the cost savings.

That leaves Enterprise's nearly completed Midland-to-ECHO 3 system and the connecting, ExxonMobil-led Wink-to-Webster pipeline as the only other major Permian Basin crude pipeline projects still moving forward.

Otherwise, North America's big crude midstream projects are mostly facing interminable deferrals or tedious fights in courtrooms and regulatory hearings.

The most famous one is TC Energy's decade-old Keystone XL pipeline, which is completed on the Canadian side of the border.

But energy analyst Ethan Bellamy of East Daley Capital stated it bluntly, "If Biden gets elected, KXL is dead. If Trump gets elected, it's on life support."

Lawsuits and water permitting issues remain, and Biden could ensure there's no presidential permit approval. Likewise, Bellamy said, Enbridge's Line 3 pipeline replacement project and Canada's Trans Mountain pipeline expansion are more likely to be built. If they are, then Canadian producers have all the pipeline capacity they need to move their volumes, he said, even if there are fewer direct paths to US Gulf Coast refiners.

The other pipeline projects still have legal and permitting hurdles, but the Line 3 project could receive a key water permit decision in November after it was delayed from an earlier August deadline.

"Enbridge continues to advance pre-construction activities as we work with permitting agencies towards the timely issuance of remaining permits," an Enbridge spokeswoman said. "We plan to start construction in Minnesota once final permits are in hand."

Likewise, the Trans Mountain expansion to the Vancouver region is about 15% built and progressing on track, the governmental corporation said.

While the three-year-old Dakota Access Pipeline won't be shuttered for now -- after a court-ordered closure was canceled on appeal -- additional court rulings are expected early next year on whether a more thorough environmental study is required and if the pipeline must be closed while the study is conducted. The next court hearing is set for Nov. 4.

The future leadership of the US Army Corps of Engineers could be critical to whether DAPL receives a favorable environmental impact statement or not.

"Just as President Trump appointed a new head of [the Corps of Engineers] and issued an executive order to speed up the review process to get DAPL built, a newly elected President Biden could also appoint a new head of [the Corps] and delay or influence the EIS review process," said East Daley analyst Ajay Bakshani in a report.

"The rancor, delays, protests and litigation broke all the norms for a pipeline battle in the US, and the saga likely will continue for some years," he added.

Biden also would consider banning new drilling on federal lands and waters. Roughly a quarter of US oil supplies come from federal leases, especially the Gulf of Mexico and New Mexico's still-booming Delaware Basin. That's why new permit filings are exploding in New Mexico ahead of the election.

Then there's the race to build a slew of deepwater, crude-exporting terminals offshore of the US Gulf Coast that abruptly came to a halt earlier this year. The only ones that still seem feasible are Enterprise's and Enbridge's Sea Port Oil Terminal, or SPOT project, and the Phillips 66-led Bluewater terminal offshore of Corpus Christi, Texas, both of which are facing indefinite delays now that US crude exports are on the decline.

"I'm interested in the radio silence on offshore deepwater port projects," said Sandy Fielden, Morningstar's director of oil and products research. "Delays waiting for 'better days' is probably the official line, but they very well could represent the straw that broke the camel's back in shale crude oil infrastructure."

WHAT MIDSTREAM CAN DO

Midstream firms deeply slashed their capital budgets earlier this year and deferred or canceled a bevy of projects, so there are fewer options left for them to deal with their large debt loads and weaker revenue streams.

That leaves a lot of firms looking at consolidation or, in the meantime, slicing seemingly bloated distribution and dividend payouts to investors, said analyst Pearce Hammond, of Simmons Energy, in a midstream earnings preview report.

There could be bigger corporate mergers and acquisitions creating an industry of fewer players, he said, and the trend of consolidation within corporations could continue, such as TC Energy's current proposal to buy up its Houston-based master-limited partnership, TC Pipelines.

And then there's the so-called energy transition as more firms are pressured to release greenhouse gas reduction pledges and net-zero carbon goals.

"The energy transition will very likely be turbo-charged under a Biden administration and is happening at a much faster pace in the financial world versus the physical world," Hammond stated. "We believe that the energy transition will lead to an energy, industry-wide consolidation, and we expect midstream companies to play a big role in that."

The industry is already heading down this path, but the pace should accelerate in 2021, Hammond said.

Although it would be increasingly difficult to build new pipelines in a Biden administration, the reality is the excess pipeline capacity in the US means there's little appetite for new construction anyway, Hammond added.

"The biggest concern would be if the Biden administration aided efforts in the environmental community to shut down existing pipelines," Hammond stated. "We do not think this is likely but, if DAPL is shut down, then Pandora's box could be opened and a new precedent set on shutting down existing infrastructure."