Investors will watch third-quarter earnings presentations for signs that North American oil and gas midstream companies can weather soft economic conditions and the rising risk of a recession.
Analyst predictions remained mostly positive against a favorable backdrop for the sector, especially for companies with exposure to liquefied natural gas exports amid strong global demand for U.S. LNG. Several market researchers pointed to increasing investor questions about companies' plans for spending and for returning money to shareholders.
"On the liquids side, it appears that demand is getting close to pre-pandemic levels, and on the gas side, rising interest in U.S. LNG from Europe (due to a preference to avoid Russian gas) should spur more LNG demand," equity analysts at research and analytics firm CFRA said in an Oct. 8 note to clients. "Our biggest concern is a recession that topples energy demand."
Focus on spending, capital returns
According to analyst consensus, most of the 11 major North American midstream companies covered by S&P Global Market Intelligence should record year-over-year gains in adjusted EBITDA, and all should report increased revenue.
In recent quarters, the midstream sector has benefited from factors that include high oil and gas prices in a global energy shortage, capital discipline by U.S. oil and gas producers that makes supplies less vulnerable to price swings, and significant inflation-based contract rate adjustments in midstream fees for 2022 and 2023. Analysts also looked favorably on midstream players' improved operating expense structures, the result of years of spending reductions.
Fitness for companies
Kinder Morgan Inc., which has touted its role in transporting about half of all feedgas delivered to U.S. LNG export facilities, is expected to kick off the earnings reporting season. In recent months, Kinder Morgan has emphasized its plans to maintain its level of market share as U.S. LNG facility demand grows by up to 15 Bcf/d by 2028.
Goldman Sachs analysts said in an Oct. 7 note to clients that MPLX LP will be top of mind for many investors among large midstream players because of its strong contract mix, clean balance sheet and high distribution yield. Investors interested in "more defensive stocks in midstream" will look for messaging about potential buyback increases, the Goldman analysts said.
"In our view, investors are generally positively inclined — particularly as a defensive play — but the capital return debate needs to be solidified for them," Goldman analysts said.
Goldman also expected Plains All American Pipeline LP to be one of the smaller midstream companies to draw investors' attention. Investors will watch for news about whether the company could pursue new projects that would drive spending higher or whether Plains might accelerate share buybacks after improving its balance sheet through asset sales.
Midstream companies have been outperforming the broader market, but companies still "lag the broader energy complex," Tudor Pickering Holt & Co. analysts told clients Oct. 7. "In the stable midstream segment, we expect mild headwinds from lower [natural gas liquid] prices."
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