US oil and gas midstream to grow by 14% in 2018, propelled by Permian Basin

Crude oil production in Permian Basin providing a much-needed uplift for midstream companies

East Daley Capital Advisors, Inc., an energy information and insights provider, reports that the overall outlook is positive for most major U.S. oil and gas midstream companies, according to a press release.

However, delays in Northeast natural gas pipeline projects and recent Federal Energy Regulatory Commission (FERC) tax policies are putting downward pressure on midstream companies with natural gas exposure.

“We see the U.S. midstream sector growing by 14% in 2018 versus 2017, which is great news for investors and midstream companies. Permian crude oil and natural gas liquids production is really fueling the growth in the sector and 2018 looks to be a rebound year for many midstream companies. Now is a great time to look closely at midstream investment opportunities,” said Justin Carlson, VP and managing director, research at East Daley Capital.

The surge in crude oil production has translated to a quicker than expected ramp in volumes on Permian export pipelines. Many of the marginal growth barrels are charged the higher walk-up tariff rates providing a boost to the margin per barrel realized on throughput, according to East Daley.

Additionally, takeaway constraints have caused regional spreads from Midland to Cushing, Houston and the Louisiana Light Sweet hubs to widen significantly.

The significant uptick in crude oil production benefits companies like Plains All American Pipeline (PAA), Enterprise Products Partners (ETP) and Magellan Midstream Partners (MMP), which East Daley has a more favorable view of versus consensus EBITDA estimates.

“Even though we see many midstream companies with natural gas exposure growing in 2018, delayed infrastructure projects in the Northeast and FERC’s recent announcement to changes in tax policies have put downward pressure on earnings expectations,” said Carlson.

“Rover pipeline expansion delays, the Mariner East 1 shut down and Mariner East 2 project delays will cause lower throughput and cash flows for companies such as Antero Midstream, CNX Midstream and MPLX.”

East Daley recommends investors in midstream oil and gas companies to look closely at the details of the new FERC rulings and how those rulings apply to specific assets in midstream companies when evaluating risk.

However, East Daley views the impacts of the FERC tax policies will have a modest downside risk on midstream companies EBITDA, with most companies ranging from 0-5% of EBITDA at risk potentially, even though outliers do exist.