PITTSBURGH—It is “still pretty good” to be a midstream MLP despite misconceptions about how that market is currently performing, said Maria Halmo, director of research at Alerian, at Hart Energy’s recent Marcellus-Utica Midstream conference.
Even though the state of being for MLP investment vehicles may be good, public perception of them may be rockier. Many investors and finance-side industry professionals, she said, encounter the following misconceptions:
- Knowing the next view on oil prices is make-or-break for midstream investors;
- Midstream/MLPs are uniquely underperforming due to prices;
- MLP growth and midstream growth is confined to the U.S.; and
- Lower production has dragged down MLPs.
Up Or Down?
The first misconception is that only oil matters. Don’t forget natural gas, Halmo advised. She noted that questions like “What’s your view on oil prices? What’s your view on oil production? Where do you think crude’s going to go?” push the natural gas element out of the picture. This, she said, darkens the overall outlook: “Oh, [the oil and gas industry] is a volumetric business. [MLPs must be down] because production is down.”
However, Halmo cited the volumes of natural gas and natural gas products flowing on very busy pipelines to drive home the point that MLPs certainly are a robust fixture in today’s energy picture. Pipelines are handling such volumes of business, she said, that the U.S. is pipeline-constrained and should be building more to meet demand. This creates obvious “opportunity for MLPs, for midstream companies and for you, the investor in MLP companies,” she said.
But Halmo emphasized that one shouldn’t be too hasty to write off midstream infrastructure outside of the U.S. as exports become part of the country’s energy business since the 2015 lifting of the ban.
Excited About Exports
Yet another misconception is that the pipeline-constrained U.S. is also overbuilt. “That might be true in some regions, but it’s not true across the country,” she said. While the U.S. may have more wiggle room for pipelines, it is not exclusively insular with its pipelines.
Halmo questioned whether some pipelines under construction would actually help alleviate export pressure. Exports are still fairly new in the U.S., and Halmo noted a recent delivery of LNG by a Russian tanker at Boston Harbor—ironic given the proximity of Appalachian gas fields to New England.
“We see so many opportunities with the [regulatory] environment that we have here in the U.S., with the technology we have in the U.S., to build the pipelines, the storage facilities, the export ports, that are going to make exports possible. … It’s ridiculous, right, that [LNG] is coming from Russia to Boston while we sit here in Pittsburgh basically on top of the Marcellus Shale,” she said.
She said that once midstream infrastructure projects go into service, the U.S.-as-exporter story will “really seem to catch hold again.”
The last misconception—that midstream-linked MLPs are alone in the energy sector as underperformers—may not be entirely accurate. Halmo boiled down a lengthy white paper that Alerian has published on the subject with this: MLPs are not alone in any underperformance, and this underperformance is something that we hope is going to turn around soon. Even as oil prices, the E&P and oil service sector have begun to recover, “MLPs have not, and the market tends to believe that the midstream is unique in that, and that’s just not true.”
Erin Pedigo can be reached at epedigo@hartenergy.com.
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