LNG is the fossil fuel poised to have the biggest earnings advantage as the North American midstream sector's great pipeline buildout cycle winds down, according to a new Sanford C. Bernstein & Co. report.
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For most midstream companies, 2022 capex is expected to be minimal, "in some cases over 70% lower than 2019 levels for the company," Bernstein analysts wrote July 29.
"This means there is a paradigm shift underway in midstream equities," the analysts said.
"We no longer need companies to spend massive midstream capex to grow," the analysts said. "... However, the downside of this is that these companies have, to some extent, lost control of their destiny, with the future cash stream now driven by the ups and downs of US production versus their choices around capex spend, building, and contracting customers."
With natural gas maintaining a slower growth curve and facing minimal rate reduction risks as hurdles to new construction get higher, LNG will perform best when it comes to long-term volumes, Bernstein said.
LNG developer and exporter Cheniere Energy is optimistic about demand for US shale gas abroad as countries build "40- and 50-year-life assets" for importing supplies, CEO and President Jack Fusco said.
A study funded by the INGAA Foundation, the research arm of the trade group representing the interstate gas pipeline industry, found that pipeline companies could add 33 Bcf/d of gas transportation capacity over 2020-25, but the study said hurdles to construction are getting higher and even forcing some projects to be canceled. These constraints on new construction make steel in the ground even more valuable, as Enbridge President, CEO and Director Al Monaco said in March.
The Bernstein analysts estimated that Appalachian gas pipeline takeaway could grow another 2 Bcf/d to 3 Bcf/d, but they also noted that the Mountain Valley Pipeline project under construction in the basin continues to face environmental permitting issues and rising costs. If the Mountain Valley pipeline were canceled, it "would be a double-edged sword" for midstream giant Williams, the analysts said. It would eliminate an additional roughly $50 million to $100 million in revenues that Williams' Transcontinental Gas Pipe Line could make, even as this "forced limitation on buildout" would protect rates on the Transco system, they said.
In Louisiana's Haynesville Shale, takeaway capacity could increase another 3 Bcf/d over the next 18 months, Bernstein concluded. Kinder Morgan executives said in July that the timeline for another pipeline out of Haynesville would be close to three years.
When it comes to takeaway for NGLs and crude oil, the Bernstein analysts expected long-term gluts in pipeline capacity, though "the difficulty in stealing customers in an NGLs system ... keeps rate erosion at bay."
There will also be more demand for companies like Enterprise Products Partners to build more NGLs export capacity as international LPG demand grows, but there will not be similar opportunities for crude oil, the analysts said.
"Even at high oil prices, E&P discipline suggests we will likely never reach the peaks of the past, and [pipeline] tariffs will fall when re-contracted," Bernstein said.
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