Midstream Companies - a Q2 preview from BMO

[dan_s]

BMO Capital Markets
Topic: US Pipelines & MLPs

Danilo Juvane, CFA • Oil & Gas

Bottom Line:

Earnings volatility and the potential of significant deviations from consensus estimates will likely be the norm during the 2Q'20 earnings season with midstream earnings likely feeling the impacts from COVID-19 driven supply and demand disruptions. The quarterly noise notwithstanding, we think sector's earnings and cash flow remain resilient longer term, with select midstream names still offering compelling risk-adjusted value. Post update for the quarter, our pecking order has been updated to EPD, ET and LNG.

Key Points

Down but not out. Supply and demand disruptions caused by the recent pandemic will no doubt impact near-term midstream earnings results, with 2Q unlikely to provide a barometer of normalized midstream earnings. However, we think investors are likely to trade near-term quarterly volatility for visibility in the intermediate term through 2021. With overall U.S. production continuing to rebound slowly, we estimate our coverage's free cash flow (FCF) to decline by a moderate ~3% and ~2% in 2020 and 2021, respectively. This suggests that in aggregate names will remain on strong footing and offer ample financial flexibility in light of a slower than anticipated recovery.

Company specific themes. Although we underscore the challenges in benchmarking quarterly prints this earnings season, we see key themes/sentiment going into earnings season as follows:

Upside bias. We think EPD and PAA could surprise to the positive, with both potentially benefiting from contango opportunities during the quarter, underscoring the benefits of an integrated platform. Additionally, we see TRGP as a candidate for a better-than-expected earnings print due to benefits of its NGL downstream business;

Earnings stability. LNG and WMB stand as the only names with reaffirmed pre-COVID-19 2020 guidance, which in our view underscores the predictability of both businesses. As midstream investors continue to favor stability, we see both companies as salient low-risk names during the earnings season;

Neutral with moderate risks. We see potential risks to KMI, MMP and MPLX during 2H20 largely from demand destruction driven by a possible COVID-19 resurgence, causing headwinds to each company's refined products and terminals businesses; and

Idiosyncratic risks. Noise around DAPL's legal challenges may continue to drag ET until more certainty is had, but we see the pipe's issues also impacting OKE and ENBL to a lesser extent.

[dan_s]

Stifel on July 16, 2020

Midstream Stat of the Week
While we believe most investors will view 2Q20 as a pass-through quarter, we expect the impacts of OPEC+ and COVID-19 to take a toll on
companies' earnings. According to FactSet, consensus estimates forecast EBITDA results to be 14% lower for the constituents of the AMZ
compared to 1Q20. When comparing 2020 estimates to 2019, consensus currently forecasts a 4% decline.