HH MLP Insights: Q3 2019

Following a strong start to the year, midstream stocks faced increased macro and geopolitical risks in Q3 as the trade war, and fears of slowing global growth, intensified. These concerns applied pressure on oil & gas prices, impacting the broad energy complex, and raising concerns about potential future production volumes. In this quarter’s MLP Insights, we highlight and analyze recent developments in the midstream energy space, including:

  • The Impact of Lower Commodity Prices
  • Exploration & Production (E&P) Sponsor Risks
  • Corporate Transactions & Overhangs

The Impact of Lower Commodity Prices

Perhaps the most impactful story in the energy markets this quarter was the lower natural gas prices, which dragged down natural gas-related stocks. Technological improvements have made it easier than ever to unlock and capture natural gas from the ground, leading to an environment of heightened supply. Correspondingly, US natural gas prices reached their lowest levels since 2016 as supply levels swelled and European natural gas prices fell to a 10-year low. In addition, high inventories of stored gas have made it difficult for prices to recover.

natural gas prices

While demand for natural gas is highly seasonal, long term trends are showing consumption is increasing, particularly in power plants due to its cleaner footprint than other fuels like oil and coal. Exports have been a big channel of growth too. US LNG exports have grown from close to zero at the beginning of 2016 to over 5.2 billion cubic feet.1 But the intense rise in natural gas supply has kept a lid on prices recently. Part of this increased output is because natgas is a byproduct of oil production, which is growing quickly in areas like the Permian Basin.

natural gas demand

While midstream entities tend to not have direct commodity price exposure if spot prices fall below levels that are profitable for production, then volumes can be reduced, and the midstream segment can suffer. Overall, the price pressure on natural gas has impacted some midstream firms involved in transporting and storing the commodity, particularly midstream energy companies (C-Corps). The midstream C-Corps segment as a whole has more exposure to natural gas than the midstream MLP segment, causing the C-Corp to underperform MLPs in recent months. C-Corps have underperformed MLPs by close to 300 basis points over the last 6 months.2

1 2 3 4
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.
Comments have been disabled on this post.