Midstream Liquidity Concerns Overblown
Operational results will worsen, but most companies should muddle through.
Our analysis of midstream oil and gas companies’ liquidity and investor payouts suggests a few areas for concern, but broadly, we think the industry can muddle through. Wide-moat companies such as Enterprise Products Partners (EPD), Magellan Midstream Partners (MMP), Plains All American Pipeline (PAA), Cheniere Energy (LNG), and Cheniere Energy Partners (CQP) remain well positioned. Gas-focused names such as Energy Transfer (ET) and Kinder Morgan (KMI) should also do well. Williams (WMB) will need to proactively address its maturity issues, given its lack of excess cash flow, but the resilience of its operations should provide a buffer.
On the negative side, we think some entities, including MPLX (MPLX), DCP Midstream (DCP), Energy Transfer, and Oneok (OKE), are under substantial pressure by investors to reduce payouts to more aggressively address high leverage or other business priorities. To be clear, we think the payouts are financially supportable, given our expectations for business results and the entities’ balance sheets, but this environment is potentially offering management sharply higher returns elsewhere, particularly around repurchasing highly discounted debt. We think MPLX, Oneok, and Williams could prioritize upcoming maturities over their payouts, given their lack of near-term excess cash flow generation if further culling near-term capital spending plans is not feasible. For DCP and Energy Transfer, we think the focus on preserving liquidity during a period when near-term results will be more challenging than at any time in the energy markets over the last few decades could force a reckoning.
Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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