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Market eyes impact of lower natural gas prices on volumes as US midstream sector reports Q1 earnings

Investors will watch first-quarter 2023 earnings presentations by North American natural gas midstream players to gauge how the drop in natural gas commodity prices is likely to affect companies’ near-term spending plans and expected throughput.

Benchmark Henry Hub gas prices have been languishing under $3/MMBtu since January in a sharp decline from the more than $9/MMBtu peak in August 2022, driving expectations of a slowdown in producer activity that has been slow to materialize.

“The focus will be on the impact to the forward outlook for volumes after the collapse of natural gas prices,” midstream analyst and CBRE Clarion Securities portfolio manager Hinds Howard said.

Analyst predictions remain mostly positive about the midstream sector into the earnings season, while some market researchers have pointed to investor uncertainty about the prospects of an economic recession versus a global demand recovery.

Eyes on volumes

Kinder Morgan is scheduled to kick off the midstream sector’s earning reporting season April 19.

“Given commodity downside is well known, we see limited risk of underperformance,” Tudor Pickering Holt & Co. analysts said in a note to clients, anticipating that Kinder Morgan investors will focus on “stabilization of the base business” and on investment returns.

Beyond questions about the impact of lower gas prices on companies’ plans for spending and returning money to shareholders, analysts expect updates from midstream executives on projects and new pipelines that could be needed to serve growing associated gas volumes from the Permian Basin.

Market watchers also anticipate discussions about the outlook for oil production during the upcoming earnings season, with additional volumes of associated gas putting further pressure on natural gas prices after a weak winter demand season.

Analysts at UBS Group and others have described the surprise OPEC+ crude oil production cuts in early April, which immediately prompted a run-up in oil prices, as a bullish factor for energy investors broadly.

“Midstream earnings outperformance will be another data point in bringing investors back to the space under a macro theme of ‘slowflation’ as every major oil/gas basin grew once again” quarter over quarter, UBS analysts said in a recent note to clients.

Fundamentals

Midstream players over the past year have benefited from factors that include high oil and gas prices as global energy security concerns bolstered demand; capital discipline by US oil and gas producers that made supplies less vulnerable to price swings; and significant inflation-based contract rate adjustments in midstream fees for 2022 and 2023. Analysts have also praised midstream companies’ improved operating expense structures after years of spending reductions.

Global LNG demand continues to provide a favorable backdrop for midstream companies with exposure to LNG exports, with spot prices that remain high compared with historical norms despite falling dramatically from record 2022 levels. Total US feedgas deliveries have averaged about 14 Bcf/d through April 18 and are on pace to set a monthly high average, should they continue at similar levels.

Kinder Morgan in recent quarters has touted its role moving about half of all feedgas deliveries to US LNG export facilities and its plans to maintain its level of market share as US LNG facility demand grows by up to 15 Bcf/d by 2028.

As US LNG developers report first-quarter earnings, investors will also be looking for signs of progress advancing new export projects to construction. Two US projects were commercially sanctioned during the first quarter — the 13 million mt/year first phase of Sempra’s Port Arthur LNG terminal in Texas and the second phase of Venture Global’s 20 million mt/year Plaquemines LNG project in Louisiana — leaving room for additional final investment decisions in 2023.

“There are certainly other projects in the US that have the potential to cross the finish line this year, although we expect it to be hit or miss with work to be done with respect to contracting and capital procurement,” Stifel analysts said in a recent note to clients.
Source: Platts

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