Fourth-quarter 2017 earnings have rolled in and the numbers, overall, look good—in contrast to some gruesome stuff in financials for the previous couple of years.
For example, Stifel noted in a report that Enterprise Product Partners LP (EPD) “posted fourth-quarter 2017 results well above our expectations … The quarter was supported by an early in-service of the Midland-to-Sealy [Pipeline] and management discussed a potential expansion to 550,000 barrels per day (Mbbl/d) from its current expected capacity of 450 Mbbl/d. EPD expects $3 billion of 2018 growth spending with limited equity needs.”
With cheery news like that it’s no surprise Stifel added it will “continue to favor Enterprise’s integrated value chain.”
Jefferies pointed out that Magellan Midstream Partners LP’s EBITDA for the past quarter was smack on the Street’s rather positive estimate: $377 million. “DCF [distributable cash flow] of $308 million surpassed our $300 million forecast, implying ~1.47x fourth-quarter coverage. Management offered initial 2018 DCF guidance ~$1.05 billion … and affirmed plans to lift cash distributions ~8% while maintaining ~1.2x coverage.”
The report noted Magellan capital projects, such as its Houston-to-Hearne, Texas, products line, are on schedule and “management continues to evaluate $500 million in additional growth projects, which are not incorporated in its current estimates” of $900 million and $375 million, respectively, for 2018-2019.
Perhaps investors who shunned the midstream for a few years will trickle back. To update them on the sector, East Daley Capital recently published a 165-page update of its 2017 “Dirty Little Secrets” report, subtitled “ The Naked Truth: Uncovering Opportunities in the Midstream Sector.”
“A stark difference from the 2017 ‘Dirty Little Secrets’ report is that there is a positive skew to the 2018 expectations vs. consensus on cash flow,” the update said.
East Daley projected “$7.2 billion (15%) in cash-flow growth from midstream companies in 2018 will be transformational for an industry beaten down in 2017.” Also, “17 of 28 companies covered in this report are expected to outperform market consensus, highlighting East Daley’s positive outlook for midstream growth.
“In many ways, 2017 was midstreamers vs. Wall Streeters. The improving midstream company operational outlook was going head-to-head with Wall Street’s deteriorating view of the [energy] industry’s capital structure. As a result, despite a 10% increase in cash flow from companies in this report, valuations were hammered,” it added.
So why write such a voluminous review? “The midstream energy industry is complicated,” the report noted. “From pipelines to storage to fractionation, the dynamics that impact the future value of assets a midstream company owns are intricate and can be tortuous to delineate. However, the naked truth is that each of these companies is no more than the sum of their parts which are, at their core, as simple as rate times volume.”
Simple, right? Maybe.
The report seconds what I have noted in this space, that there are a lot of different fish thrown into one midstream bucket. An operator focused on, say, gathering and processing for Niobrara operators will offer different returns than a terminal operator on the Gulf Coast loading petroleum products on Africa-bound tankers. But both are in the midstream, as the report noted.
“Despite growing cash flows and an oil price recovery, the market keyed in on sluggish production growth and concerns about overextended capital structures. As a result, some companies used 2017 as a transition year to realign their capital structure. Others may be looking to the success of their operations to wash away the ashes of 2017, leveraging a 22.8% rise over the last year in the U.S. oil benchmark price West Texas Intermediate. At today’s prices the industry is growing, which in general will lift all ships,” it said.
With that kind of optimism, we can expect the midstream slice in a lot of investment portfolios to be cut larger this year. Expect the phones of midstream investor relations departments to start ringing more, and hotel ballrooms to be more crowded at investor conferences.
“After a brutal 2017, 2018 could be transformational, ripe with opportunities,” East Daley concluded.
We can all hope the report’s right. The midstream has a good story to tell and it’s time for investors to pay attention again.
Paul Hart can be reached at firstname.lastname@example.org or 713-260-6427.
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