Summary
- Midstream 1Q21 results were largely strong, with winter storm impacts driving some rare billion-dollar EBITDA beats for the quarter, and an improving macro backdrop also proved supportive.
- Buyback activity was mixed in 1Q21 as companies continue to weigh capital allocation priorities, with buybacks a focus for some and more opportunistic for others.
- Consistent with recent quarters, opportunities around renewables and the energy transition were widely discussed, but for many companies, these initiatives remain in early stages.
Midstream 1Q21 earnings season can largely be characterized as a “beat and raise” quarter for the space, with some particularly outsized beats from companies that were able to capitalize on opportunities stemming from the severe winter weather in February. Though some companies faced headwinds due to the weather, these seemed to be fairly muted and offset to some extent by an overall improving macro backdrop. Combining widespread beats with a stronger macro backdrop, management teams largely struck an optimistic tone on the future. In many cases, guidance increases were not just a function of the one-time storm benefits but also reflected an improving outlook for base businesses as well. Today’s note looks at a few key takeaways from midstream earnings season.
Winter storm drives some billion-dollar beats, more interest in long-term capacity.
Kinder Morgan’s (KMI) $1 billion beat relative to consensus EBITDA expectations announced on April 21 set the tone for a strong midstream earnings season, specifically raising expectations for companies with natural gas assets. Enterprise Products Partners (EPD), ONEOK (OKE), Targa Resources (TRGP) and Williams Companies (WMB) are among the companies that provided impressive beats due in part to weather-related benefits. Energy Transfer’s (ET) results announced on May 6 put an exclamation mark on midstream earnings season, as the company decimated estimates for the quarter and reported a $2.4 billion benefit from the storm for full-year 2021. While these impressive beats were clearly a one-time event, the cash windfall is still a nice surprise and useful for advancing capital allocation priorities, be it debt reduction or buybacks. For example, ET used cash generated to retire $3.7 billion in debt in 1Q21.
Several companies noted on their earnings calls that customers had expressed more interest in long-term capacity commitments for storage and/or transportation in the wake of the storm, including ET, OKE, and KMI. KMI is already looking to sell long-term firm capacity and evaluating some related capital spending to help customers better navigate extreme weather in the future. OKE’s management mentioned that they had just launched an open season for 1 billion cubic feet of storage in West Texas. Though the windfall from the storm is a non-recurring benefit, it could encourage more long-term commitments from customers, supporting base businesses over time.
Improving macro backdrop also contributes to results and positive outlooks.
While one-off winter storm impacts benefitted many midstream names, several cited improvements in the macro environment due to stronger commodity prices as further supporting guidance increases and positive outlooks. For example, excluding winter storm benefits, ET raised its 2021 EBITDA guidance by $100 million at the midpoint and also indicated that Permian crude volumes have increased on its system since the end of 1Q21 as upstream activity has picked up. Magellan Midstream Partners (MMP) raised guidance for distributable cash flow by $50 million due to strong 1Q performance that included an estimated $25 million uplift from the storm and a stronger pricing environment for gas liquids blending, while also taking into account the negative impact from a recent asset sale. WMB increased its guidance midpoint by $100 million relative to a total storm benefit of $77 million citing improvements in the base business. WMB noted that 1Q21 EBITDA was up 12% from 1Q20, and even excluding the storm, it was up 6% from the prior year. One exception to this is KMI, which beat expectations by $1 billion but only raised full-year EBITDA guidance by $850 million due to a combination of lower petroleum product volumes, lower Jones Act tanker renewal rates, lower gathering volumes in the Eagle Ford, and other items. With WTI oil prices hovering over $65 per barrel at writing and widespread vaccine deployment in the US, the macro environment is likely more supportive than anticipated in late 2020 or early 2021.
Buybacks mixed in 1Q21 as companies balance capital allocation priorities.
Buyback activity was mixed in the first quarter. A few midstream companies did not make any open market repurchases during the quarter, including Plains All American (PAA), MMP, EPD, and KMI. That said, repurchases remain a priority for many from a capital allocation standpoint or an opportunistic tool for enhancing returns to shareholders at a minimum. PAA reiterated plans to allocate up to 25% of 2021 free cash flow (FCF) in excess of distributions to buybacks. Similarly, MMP indicated that 2021 FCF after distributions, including $270 million in recent asset sale proceeds, could be opportunistically used for buybacks. KMI noted that buybacks will be opportunistic and compared with other uses of capital and their returns. For examples of companies that were active with buybacks in 1Q21, MPLX (MPLX) repurchased $155 million in units during the quarter, and Western Midstream (WES) repurchased $16 million in units, while also announcing a sequential distribution increase of 1.3% consistent with a targeted annualized growth of 5%. Please see these recent pieces for more on midstream distributions/dividends and buybacks.
Renewables and energy transition opportunities.
Consistent with recent quarters, opportunities related to the energy transition and renewables were a common topic across earnings calls. For many companies, these evaluations are in their early stages. Investors will largely need to stay tuned for more details around potential projects and initiatives involving carbon capture, hydrogen, renewable diesel and related feedstocks, renewable natural gas, and other opportunities around sourcing power from wind or solar facilities. On the solar front, WMB noted three additional solar projects bringing its total backlog to 16 projects representing an investment of over $250 million with operations expected to begin in 2023.
While details remain limited, some companies provided a glimpse under the hood into projects being developed. ET’s management indicated that they are working on a carbon capture project at the Marcus Hook terminal, which appears viable even without federal tax credits. Enbridge (ENB) mentioned the potential for a carbon dioxide trunkline in Northern Alberta and also expanded on its recently announced renewable natural gas partnership with Walker Industries – a major landfill player – and Comcor Environmental. In addition to the Niagara project that is under construction, the partners are looking at 10-15 other opportunities currently. Also of note, EnLink (ENLC) announced a target to achieve net zero emissions by 2050 joining the ranks of WMB, ENB and anticipated spin-off DTE Midstream, which also have net-zero targets by 2050.
Bottom line
While storm benefits made for some eye-catching 1Q21 results from midstream, improvements in base businesses and the macro backdrop add to a constructive outlook for the space going forward.
