1Q20 Midstream/MLP Earnings Preview: Commentary to Trump Numbers
For midstream and energy in general, investors will be more interested in management commentary and outlook on quarterly calls than on 1Q results. Setting aside company-specific updates, investors will be focused broadly on capital spending plans, financial positioning, and forward guidance, including commentary around the sustainability of dividends. Below are some of the key topics that will likely be in focus for midstream this earnings season.
Financial guidance – With the uncertainty surrounding a recovery in energy demand contributing to an unclear outlook for oil and natural gas prices, it is difficult to provide forward financial guidance in this environment as customer plans likely remain fluid. Some companies may pull past guidance due to the uncertainty, while others may provide updates based on clearly outlined assumptions, which may or may not materialize. Other companies may be better positioned to give firm guidance given the nature of their assets and customer base. In announcing 1Q results yesterday, Kinder Morgan (KMI) lowered 2020 Adjusted EBITDA guidance by 8% to $7 billion (also an 8% reduction from 2019) with a detailed breakdown of the various assumptions driving the change.
Dividend outlook – While many midstream companies have already announced dividend cuts (read more), others have maintained or indicated that they plan to maintain or grow their payouts. Investors will be looking for updates on how companies balance prioritizing the dividend for an income-focused investor base with conservative financial management and the potential need for more financial flexibility in today’s environment. For example, KMI decided to increase its dividend by 5% instead of the 25% previously outlined, with management noting an intention to be conservative and protective of the balance sheet. Management reiterated a commitment to achieving the prior target potentially with the 4Q20 dividend if economic activity normalizes.
Capital spending – Reductions to capital spending plans have already been widely announced across midstream (read more here and here), but another wave of cuts could be coming as companies talk to customers and partners on projects. Proposed pipeline expansions are likely to be tabled, and newbuild projects may be deferred in some cases, with multiple oil pipelines already deferred. Phillips 66 (PSX) and Plains All American (PAA) have deferred the Red Oak pipeline (from Cushing and Midland to the Texas Gulf Coast) and Phillips 66 Partners (PSXP) has deferred the Liberty Pipeline from Wyoming to Cushing and postponed final investment decision on the ACE Pipeline in Louisiana. Yesterday, KMI reduced its 2020 discretionary capital by 30% to $1.7 billion.
Liquidity, leverage, and plans for any upcoming debt maturities – Financial positioning will likely be a key topic in prepared remarks and analyst questions with a view to better understand each company’s ability to weather current headwinds. For companies with debt coming due over the next year or two, plans for retiring the debt will likely be a focus. Investors may also be interested in recent actions by rating agencies and any steps companies may be taking to preserve investment-grade ratings.
Views from the ground – With inventories rising and available storage shrinking (read more), investors will be looking for more information on physical market constraints and the implications for midstream.
Investors will also be wanting to get a sense of conversations with customers and any potential for contracts to be renegotiated as seen on occasion back in 2014-16. Investors will also be interested in the protective features included in midstream contracts and more clarity on the cash flows covered by those contracts if not already provided. On the call yesterday, KMI was asked about the potential impact on their business if Texas prorates oil production. Management noted broadly that force majeure events do not remove the obligation of the customer to pay under the tariffs on their interstate natural gas pipelines, which constitutes a significant portion of their business.