Midstream sub-sector in great shape

[dan_s]

Tom Abrams – Morgan Stanley
June 11, 2018 2:30 AM GMT

With SEP, EEP, EEQ, and WPZ likely disappearing via buy-ins, we update puts and takes across the Midstream arena and review top picks and recent momentum.

Bar Getting Raised.
It has been a winning midstream strategy to simply stay out of trouble, or at least less trouble than others. But with the likely elimination of some FERC-impacted firms via buy-ins, the competition to positively differentiate going forward will likely be that much tougher.
> We are focused on retained DCF to feed growth and/or equity accretion via debt reduction, suggesting support for valuations if not multiple expansion as balance sheets strengthen. >

> Many have stabilized, a few are positioned to grow DCF/unit, and a few more quarters are needed for more "clean" structures. We see KMI, EPD, and TRP as steady deliverers going forward.

> Fundamentals? Project profiles are improving across the sector. Fundamentals are OK! Though the Permian leads the basin parade in terms of needed projects, other areas including the Bakken, DJ Basin, STACK, Louisiana, and Marcellus-Utica need infrastructure as well.

> New and anticipated markets of liquids exports, LNG, and petchems are also setting up next waves of required projects to serve. Capex across the industry has remained high, putting financing pressures on those that have not altered their payout philosophy.

> EPD, PAA/PAGP, MPLX, and ETE are recommendations well positioned for additional volumes and projects.