Anyone following the energy infrastructure space for a while has probably heard about the long-term contracts set up by midstream companies, making it highly relevant to unpack how and why this matters.
Midstream contracts are a primary reason why the sector is less sensitive to inflation and rising interest rates than other income sectors. Midstream contracts offer more visibility to the cash flows and the fees that these companies are going to generate, Stacey Morris, CFA, head of energy research at VettaFi, said.
“These can be really long term contracts, especially contracts around liquefied natural gas facilities,” Morris said. “The pipeline contracts for supplying those facilities can be 20 to 25 years, and then…the customers are signing up for purchase agreements that are maybe 20 to 25 years in length as well.”
LNG contracts tend to be the longest, spanning decades, due to the fact that it is considerably expensive and effort-intensive to build an LNG export facility.
“That’s a big endeavor. You have to get a lot of permits, you would have to go through regulatory hurdles, and then building an LNG facility isn’t cheap. These are multi year construction processes,” Morris said. “So because of that, you want to have good visibility to cash flows once the project is completed, and that also relates to financing the projects.”
Additionally, in order to get financing for these projects, there need to be contracts in place that offer transparency to future cash flows.
“These long term contracts are really supportive of developing those projects, in securing financing, and that’s why they tend to be longer in nature,” Morris said.
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