Investors will watch second-quarter midstream earnings presentations for signs that companies can navigate volatile commodity prices and concerns about the rising risk of economic recession.
Analyst predictions remained largely positive against a favorable backdrop for the sector, anticipating that management teams would use the earnings season to defend their company outlooks and spending plans and to project confidence about 2023. Kinder Morgan kicked off the reporting season July 20.
Factors that bode well for midstream players include high oil and gas prices supported by a global energy shortage; capital discipline on the part of US producers, which made supplies less vulnerable to price swings; and “extremely significant” inflation-based contract rate adjustments in midstream fees for 2022 and 2023, Raymond James analysts said in a July 20 note to clients.
The analysts also pointed to the improved operating expense structures of midstream players after years of spending reductions, as well as stronger balance sheets and increased M&A activity, leaving companies with bigger and more stable asset bases that afford more marketing opportunities to mitigate market volatility.
“Stocks are down, but free cash flow generation into 2023 shouldn’t be, in our view,” Raymond James analysts led by Justin Jenkins said.
According to analyst consensus, the 12 major North American midstream companies covered by S&P Global Market Intelligence should all record year-over-year gains in adjusted EBITDA and increased revenue.
Backing billions of dollars of infrastructure with long-term, fee-based contracts has enabled the midstream sector to become a “free cash flow powerhouse” over the past year as capital spending fell, fueling buybacks and dividend growth, Alerian director of research Stacey Morris said in a recent note.
Focus on natural gas, LNG
Analysts said midstream companies’ natural gas projects and exposure to LNG will likely remain in the spotlight, as investors continue to watch for signs that companies are pursuing new infrastructure growth opportunities.
“We expect natural gas and LNG to remain front-of-mind throughout this quarter’s earnings cycle,” Credit Suisse analysts said in a note to clients.
Market observers will look for progress in advancing US LNG export projects and associated infrastructure to construction after a wave of commercial activity at Cheniere Energy and other companies. Midstream companies in recent months have discussed a need for more infrastructure in production regions that include the Permian and the Haynesville shale basins, with demand surging for US LNG exports that issue from terminals concentrated on the Gulf Coast.
Credit Suisse said the bulk of volume growth would likely happen in the second half of 2022.
Tudor Pickering Holt & Co. analysts expected investors to focus on midstream companies’ “willingness to defend equity values” after stocks have trended down with the broader market.
Source: Spglobal.com