Pipeline Earnings Confirm Positive Trends

Energy remains probably the least loved of the S&P 500’s 11 sectors. Over-investing in new projects has turned off many investors, who would like to see more cash returned via buybacks and dividends. And the Democratic primary debates remind that an anti-fossil fuel stance is needed to excite the party’s hard core, introducing some electoral uncertainty to the outlook.

The good news is that cash flows are growing, as pipeline companies are responding positively to investor feedback (see The Coming Pipeline Cash Gusher). And the aspirational goals of some Democrats to phase out oil and gas will collide with technical realities and popular reluctance to return to 18th century living standards.

Pipeline Stocks_High Yields_Growing Cashflows

Earnings season is generally confirming the positive free cash flow story we’ve articulated for midstream energy infrastructure (see The Coming Pipeline Cash Gusher). Enterprise Products Partners (EPD) continues to execute well, beating EBITDA expectations by around 10% with 18% year-on-year growth. Williams Companies (WMB) modestly exceeded expectations and provided good guidance, boosting the stock. This highlights that weak natural gas prices, which had kept the stock under pressure for a couple of weeks, have little impact on operating performance.

TC Energy (TRP), formerly known as TransCanada) reported another solid quarter. And Oneok (OKE) reported Distributable Cash Flow (DCF, the cash generated from existing assets after maintenance expense), of $541 million, $100 million ahead of expectations. Only Western Gas (WES) bucked the trend, with poorly-timed lower guidance just when Occidental (OXY) is considering selling their position following the acquisition of Anadarko (APC).

Midstream energy infrastructure has undergone a transformation in recent years. Predictable and rising distributions were abandoned when the Shale Revolution required new pipelines. Income seeking investors felt betrayed, and many big MLPs converted to corporations so as to access a far broader set of investors (see It’s the Distributions, Stupid). Today, MLP-dedicated investors are missing two thirds of the sector including most of the big companies.

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Disclosure: We are invested in EPD, OKE, TRP, and WMB

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