Steady Midstream EBITDA Outlooks Contrast with Performa

Summary

Forward EBITDA estimate revisions for midstream have been resilient in contrast to other sectors of energy because of their fee-based business models and contract protections such as minimum volume commitments.
Though EBITDA guidance revisions were not universally positive in the second quarter, the defensiveness of the midstream business model is apparent in the companies maintaining or raising guidance significantly outnumbering those lowering expectations.
The stability in the outlook for midstream EBITDA in 2020 and 2021 contrasts starkly with the volatility and weakness in midstream equities this year. This disconnect between performance and fundamentals suggests potential room for improvement if midstream companies can remain financially disciplined and execute consistently.

With 2Q20 midstream earnings season wrapping up last week, the focus has been primarily on the outlooks for MLPs and midstream companies with investors keyed in on the ongoing recovery in energy demand. Today’s piece compares forward EBITDA estimates for midstream against other sectors of energy and discusses company guidance revisions announced with 2Q releases. After an admittedly turbulent few months, these updates highlight the resilience of midstream and help to clarify expectations for the space for the remainder of this year.

Modest midstream EBITDA revisions contrast with broader energy, highlight stability of cash flows.
While uncertainty for both midstream and broader energy remains given concerns about COVID-19’s ongoing impact on oil demand, forward EBITDA estimate revisions and updated guidance can help provide clarity. The chart below shows how index-level consensus forward EBITDA estimates for 2020 and 2021 have changed from January 31 to August 13 for midstream and other sectors of energy per Bloomberg. Given the recent conclusion of 2Q earnings season, 2020 and 2021 estimates should be freshly updated to reflect the latest views on the space since our last update (read more). Midstream, as represented by the Alerian Midstream Energy Index (AMNA), has had the smallest revisions at only -1.8% for 2020 and -4.5% for 2021. MLPs, as represented by the Alerian MLP Infrastructure Index (AMZI), had a comparably larger decrease of -8.2% for 2020 and -13.2% for 2021 but remained relatively muted. In contrast to midstream, oilfield services companies, as represented by the PHLX Oil Service Sector Index (OSX), and the broader energy sector, as represented by the Energy Select Sector Index (IXE), each saw their forward estimates drop by more than 30% for 2020 and 40% for 2021. Exploration and production companies, as represented by the S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOP), saw the most severe revisions at more than 60% for both 2020 and 2021.

Midstream EBITDA estimates have been resilient in contrast to other sectors of energy because of midstream’s fee-based business models and contract protections such as minimum volume commitments, which have helped to shield the space (read more). Despite forward EBITDA estimates barely budging for midstream since oil’s collapse, especially compared to other energy sectors, the space has not been spared from weakness in equity price performance as discussed below – a point of frustration for long-term midstream investors.

2020 outlooks largely maintained or raised with a few notable exceptions.
Despite a challenging macro environment in 2Q, full-year 2020 guidance for midstream was largely resilient with only a few companies trimming their projections. The table below shows select 2020 EBITDA guidance updates announced with 2Q results and compares them with the outlook in place prior to earnings season. For example, if a company lowered its 2020 outlook in March, the table below would compare to the March guidance instead of the outlook from the start of this year. To be clear, some companies, including Williams (WMB), Enbridge (ENB), and Cheniere (LNG) have maintained guidance issued prior to the onset of the COVID-19 pandemic. Overall, guidance was largely maintained or increased relative to expectations before earnings season. Of the 28 companies listed below, 20 raised or maintained guidance, including those expecting to come in at the low-end of the provided range. A handful of companies also narrowed guidance ranges or provided qualitative expectations for where guidance is trending.

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The number of companies raising or maintaining guidance helps reinforce the stability and reliability of midstream cash flows despite a tumultuous macro environment. Twelve companies reaffirmed their 2020 EBITDA guidance in 2Q20, including large C-Corps WMB and LNG and MLPs Enable Midstream (ENBL) and NuStar Energy (NS). Two companies – DCP Midstream LP (DCP) and Oasis Midstream Partners LP (OMP) – reinstated guidance after previously pulling guidance for the year. The large companies that announced lower guidance generally had small revisions, such as Kinder Morgan (KMI), which lowered its EBITDA guidance by 1%, and Magellan Midstream Partners (MMP), which trimmed the top end of its distributable cash flow guidance by $25 million (down 1.2% at the midpoint). Notably, Energy Transfer (ET) reduced its EBITDA guidance by 3.3% to $10.35 billion at the midpoint and cited the uncertain pace of the recovery in production volumes and commodity prices. Setting aside OMP’s reinstated guidance below prior expectations, the largest negative guidance revisions came from a few smaller midstream names, including Genesis Energy (GEL) and Summit Midstream Partners (SMLP). Of note, GEL has been negatively impacted by challenged economics and cancellations within its soda ash business, a non-midstream activity prone to commodity price volatility.

EBITDA estimate revisions and company guidance updates suggest a disconnect with performance.
The stability in the outlook for midstream EBITDA in 2020 and 2021 contrasts starkly with the volatility and weakness in midstream equities this year. Midstream, as represented by the AMNA Index, is down 24.6% year-to-date through August 14, while MLPs (AMZI Index) are down 35.5% on a total-return basis (see chart below). Even though EBITDA estimates for midstream have been much more resilient, the equity performance for midstream has been more in line with broader energy as represented by the IXE, which is down 34.3% on a total-return basis. This disconnect between performance and fundamentals suggests potential room for improvement if midstream companies can remain financially disciplined and execute consistently. Notably, midstream and MLPs have performed in line or better than other sectors of energy and the broader market since earnings began, which could indicate some improvement in sentiment or potentially some rotation into the space to capitalize on dividend announcements. From July 22 through August 14, the AMEI gained 5.8% on a total-return basis, while the AMZI was up 3.5%. For comparison, broader energy (IXE) fell 1.0%, WTI crude rose 0.1%, and the S&P 500 increased 3.5% over the same period.

Bottom Line
Though EBITDA guidance adjustments were not universally positive for the second quarter, the defensiveness of the midstream business model is apparent in the significant number of companies maintaining or raising guidance. The stability of 2020 and 2021 EBITDA estimates in light of considerable stress is a clear differentiator for midstream relative to other energy sectors, yet midstream performance has been relatively in line with broader energy. Though midstream outperformed during earnings season, a continuation of that trend will require sustained execution and discipline as well as fresh investor interest in the space.

Steady Midstream EBITDA Outlooks Contrast with Performance

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