International
US gas midstream sector’s growth challenges in focus as earnings season looms
Investors want natural gas midstream operators to prove they can grow and keep costs down at the same time. Project delays could make that difficult.
Kinder Morgan highlights the market dynamics that will be in focus as it kicks off Wednesday the sector’s reporting of second-quarter financial results. The Houston-based company has faced several construction-related delays with one of its biggest projects, its Elba Liquefaction export terminal in Georgia. Opposition has stalled or delayed other developers’ projects, especially in the US Northeast.
Analysts expect the operators of pipelines, processing plants, gathering systems and LNG facilities to continue to face pressure to secure fixed-fee and long-term capacity agreements, while also taking advantage of market opportunities in prolific shale plays such as the Appalachian and Permian basins. Trade barriers, such as tariffs on imports of pipeline materials, also could impact costs.
“With ongoing efforts to de-carbonize our energy footprint, intense opposition to new development, incremental supply growth reliant on export absorption, and commodity prices which threaten select producer solvency, macro headwinds now dwarf sector-specific improvements,” Jefferies said in a note to clients Monday.
Kinder Morgan, which moves more than a third of the natural gas consumed in the US, has been betting on global demand for domestically produced LNG to be a major driver of its growth opportunities into the next decade, not only on its own pipeline systems but also through the liquefaction terminal it is building. Success will depend in part on the company’s ability to manage its schedules and input costs.
Elba is one of two liquefaction facilities among the first wave of major US export projects that has yet to start up. Shell is supporting the Elba facility with a 20-year contract to buy LNG produced there. Besides Elba, Kinder Morgan is developing two pipelines designed to boost Permian gas takeaway capacity, and it has suggested there is the potential for a third.
Seaport Global Securities expects Kinder Morgan’s outlook to focus on a “revised start-up timeline” for Elba and also its efforts to complete the two Permian projects, one of which it noted has faced “some opposition in procuring right of way and also concerns on its impact to the wildlife and water resources on its pathway in Texas.”
Over the next several weeks and into early August, gas midstream investors will also hear earnings reports and long-term outlooks from Dominion Energy, Enterprise Products Partners, Cheniere Energy, TC Energy, Pembina Pipeline and Energy Transfer, among others.
The volatility of commodity prices — which has impacted producers and, in turn, midstream operators hoping to boost volumes on their networks — is something the market will be looking for companies to address in their outlooks, Jefferies said.
“The fundamental landscape darkened for midstream entities in 2Q as commodity price declines, and a deterioration in futures strips, prompted renewed concerns of E&P financial health and growth abilities; as many producers have advertised plans to live within internally generated levels of cash flow, lower prices have a direct feedback loop to production abilities,” Jefferies said.
