Low natural gas prices will likely hurt production in the near term, and deliver hits to volume and EBITDA growth for many midstream companies, Alerian said in a recent report.
Getting through this period will require operators to redouble their efforts on cost efficiency and capital discipline, Alerian said, and diversified operators will have the edge.
“A midstream company with leverage to one producer in one basin clearly has a different risk profile than a diversified midstream company with multiple customers across different geographies and commodities,” Stacey Morris, Alerian’s director of research and author of the report, told HartEnergy.com. “That said, a midstream provider with an E&P parent may benefit from the support of the parent and their aligned interests.”
Gas prices are about 55% below where they were in mid-November 2018, yet not necessarily causing trouble for all components of the industry. Morris noted in her report that The Williams Cos. Inc. differentiated between “demand-pull” and “supply-push” pipelines.
Gathering pipelines are considered supply-push. When a producer cuts back in response to lower natural gas prices, those lines lose volumes. By contrast, a pipeline moving gas to a utility customer or LNG export facility would presumably be less impacted by price trends.
And there’s more to the current price climate than just an overabundance of the commodity. Morris also cited LNG export project delays and the weather in her analysis.
Nor has the market entered a doomsday scenario.
“Current price weakness should not be interpreted to mean that existing midstream gas assets are distressed, but instead that the price environment has implications for near-term growth,” Morris wrote.
The benchmark Henry Hub natural gas price averaged $2.37 per million British thermal units (MMBtu) in July, the U.S. Energy Information Administration (EIA) reported in its most recent Short-Term Energy Outlook. The average price was only 3 cents/MMBtu lower than the June average but prices fell so quickly by the end of the month that the EIA adjusted its second-half average price forecast to $2.36/MMBtu from $2.50/MMBtu just a month earlier.
But if the rest of 2019 will be challenging, both Alerian and the EIA see some relief on the way. The EIA’s models project prices coming into balance with rising domestic and export demand, with the expectation of an average $2.75/MMBtu price for 2020.
And Morris sees bright spots in how the industry is dealing with the slump.
“Producers seem to be responding to today’s price environment, which should be constructive for avoiding a prolonged period of weak natural gas prices,” she said. “From a midstream perspective, the current environment of depressed natural gas prices is likely more meaningful to the pace of growth over the next several months, particularly for gas gathering and processing companies. The long-term thesis for midstream natural gas assets remains intact, and existing natural gas assets shouldn’t be considered distressed.”
Morris also expressed doubts that worries about the weakening global economy will upend midstream operators, noting significant private equity involvement in the space.
I don’t believe interest from private equity has changed because the long-term thesis for U.S. midstream assets has not changed,” she said. “Private equity could be a source of capital as a JV partner, for example.
“Midstream has been a bright spot in energy this year relative to other subsectors,” Morris added. “In terms of attracting capital, midstream is likely better positioned than other sectors of energy due to its defensive, fee-based business model.”
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