Morgan Stanley likes several of our midstream companies - Fe

[dan_s]

Devin McDermott – Morgan Stanley
February 8, 2021

A generally positive first set of prints received mixed investor reaction as investors weigh the pace of economic reopening, expectations for how FCF will be used, and adaptation to decarbonization trends.
A fairly consistently set of solid 4Q results thus far in earnings once again serves as a reminder of the stability of the midstream sector even with ongoing pandemic challenges. Of the five names within our coverage that have now reported (EPD, HESM, KMI, MMP, MPLX), all beat consensus EBITDA estimates. Resiliency has been attributable to contractual protections, stabilization (even if short of full normalization) in production and downstream refined product demand trends from 2Q 2020 dislocations, and particular strength in NGL end market recovery (export/petrochemical). Market reaction this past week was mixed and notably negative in certain cases (MMP, EPD) despite the solid prints, driven by a variety of factors based on investor feedback: (1) the cadence of vaccine distribution and potential influence of variant virus strains has left some lingering uncertainty in forward outlooks and general conservatism in guidance; (2) lack of clarity around allocation of FCF, with several managements preferring to evaluate the progression of 2021 results rather than committing to specific guidance or frameworks today; (3) uncertainty around decarbonization trends and a need for further communication of strategies to preserve terminal value.; and (4) for MLPs disinclined to pursue C-corp conversion, investors are wrestling with how MLPs can counteract a narrowing investor base (particularly where unit buyback intentions are less clear). We expect to see further strength in results as we move through 4Q earnings, but messaging around these issues could continue to temper market reaction.