Accurately assessing the value of—and prospects for—a midstream energy company requires a deep, detailed analysis that considers the firm’s individual processing plants, pipelines, storage and other assets; asset location and the degree to which the assets complement each other; and the underlying contracts that generate revenue. Do less, and you may be getting a pig in a poke. It’s true, things are definitely looking up in the midstream sector, but that hardly makes every midstream company a winner. Today, we review highlights from a new East Daley Capital report that shines a harsh, bright light on the inner workings of more than 20 U.S. midstream companies.
A house for sale can look move-in-ready from the curb, a year-old SUV can look sparkly and spiffy on a dealer’s lot, and a prospective date on match.com … well, you get the idea. Everyone—including the folks that run midstream companies—tries to put their best foot forward, to highlight their most positive attributes, and to de-emphasize the real turn-offs. Nothing and no one is absolutely perfect—we get that—but surely it makes sense, if you’re evaluating a midstream company’s value and prospects, to gain as full an understanding as you can of what’s not put out there on a pedestal for public view. In a newly issued report, Dirty Little Secrets—Lifting the Covers on Midstream Energy Company Risk, our good friends at East Daley Capital have done a lot of that work for you, taking company-by-company analyses far beyond the general overviews that are typically offered by research firms. (More information on the report, which runs more than 100 pages, is available here.)
The report’s general analysis and its detailed look at 23 midstream companies provide a number of thematic insights that are helpful when considering individual midstreamers’ pros and cons. We can’t get to them all, but in this blog series we’ll discuss three themes that stand out to us. One is that a surprising number of supply-push contracts for gas and crude pipeline capacity will be expiring in the next few years, and in many instances the likely terms for contract extensions or renewables may be much less favorable to the pipeline owners. A second theme in the report is that vertically integrated midstream companies that, for example, can gather natural gas, process it to remove natural gas liquids (NGLs), then pipe gas to market and mixed NGLs (or “y-grade”) to storage and/or fractionators—and maybe even fractionate the y-grade into ethane, propane and other “purity products” —have a real leg up on midstreamers whose assets are more disjointed. The third insight we’ll focus on is that location really, really matters—that is, the near- and mid-term success of a midstream company depends to a significant degree on how many of its pipelines, processing plants and other assets serve production areas are on the rise and not on the ropes. The only way to know how a specific midstreamer stacks up in these three categories (exposure to contract-expiration risk; degree of vertical integration; and favorable/unfavorable locations) is to do what the report does, which is to pull back the corporate curtain, switch on a 5,000-lumen flashlight, and start poking around.