High commodity prices buoyed expectations for midstream players for the fourth-quarter 2021 earnings season, but market observers will be watching for signs of pressure on spending from inflation and producer activity.
"Capital creep due to inflation and deferred spending during the pandemic could set off alarm bells with energy investors who may harbor a 'fool me once' skepticism," analysts with Mizuho Securities said in a Jan. 12 note to clients.
"By the same token, a lack of investable opportunities may keep outer-year growth rates modest, especially if commodities do not maintain most of the ground gained in 2021," the Mizuho analysts said. "But we see the downside risk to commodity exposure as more muted than in previous years."
Commodity prices and measured upstream production are expected to limit capital spending, analysts agreed. Accordingly, they will place a major focus during the earnings season on any dividend hikes and full-year 2022 spending plans.
"Key factors we'll be watching with guidance will be capex creep [versus] capital return expectations, insights around increasing producer activity and commodity expectations, company pricing power in an inflationary environment, and thoughts around the recent flurry of midstream M&A," analysts at Credit Suisse told clients in a Jan. 19 note.
According to analyst consensus, year-over-year growth in fourth-quarter 2021 adjusted EBITDA and revenues should prevail for most of the 11 major North American midstream companies analyzed by S&P Global Market Intelligence. Most of the companies will likely see quarter-over-quarter increases in adjusted EBITDA.
The first midstream company to report fourth-quarter 2021 earnings was Kinder Morgan Inc. on Jan. 19. Sector observers highlighted growth in EBITDA and distributable cash flow while saying connections to the country's growing LNG export sector could bolster the investment case for the company in 2022.
The country's largest LNG exporter, Cheniere Energy Inc., was widely expected to benefit from surging global gas demand in 2021 and into 2022.
Analysts pointed to limited direct commodity price exposure of players in the midstream space, which were expected to benefit from higher volumes of fuels flowing through their transportation and storage assets. Large owners of pipeline and storage assets such as Kinder Morgan and Energy Transfer LP also have the potential to take advantage of pricing dislocations, as was the case during the February 2021 winter storm event, according to analysts at CreditSights Inc. The CreditSights analysts said midstream firms could also benefit from inflationary pressures, with direct benefits such as pipeline tariff escalators embedded in projects.
At the same time, analysts have pointed to stagnant refined products demand and costs that could rise with increasing producer activity and inflation. Market observers will watch for environmental, social and governance momentum.
In the case of Kinder Morgan, analysts pointed to the company's July 2021 acquisition of RNG developer Kinetrex Energy for $310 million, as well as the longer-term potential for expanded carbon capture and storage facilities. But the analysts also acknowledged that the cloud of the COVID-19 pandemic remains over the sector in 2022.
"As always, pace and severity of the pandemic remains a wild card for demand, but we prefer to think optimistically and that the recovery narrative will remain dominant," Mizuho analysts said.