To succeed over the long term in the music business, professional sports, or the midstream sector, you need to learn from your successes and failures, and — most important — continue adapting and evolving. For many North American midstreamers, a key to success has been a thoughtful combination of expansion and diversification, plus an affinity for financial discipline, especially when the broader energy industry is going through tough, uncertain times. A prime example of that strategy is Canadian midstreamer Pembina Pipeline Corp., which after C$14 billion in acquisitions over the last four years is instituting a more cautious approach to new investment that’s largely based on self-funding and a new, more rigorous return criteria for new projects. Today, we preview our new Spotlight report, which focuses on the risks and rewards of Pembina’s new strategy.
Spotlight is a joint venture of RBN Energy and East Daley Capital Advisors. With the support of Oil & Gas Financial Analytics, Spotlight reports provide “deep dives” into the fundamentals that shape the outlook for midstream energy companies and are included as part of our Drill Down report series, which is available to RBN Backstage Pass members. Spotlight should not be viewed as investment advice.
Despite continued oil price weakness and a still-tumultuous macro environment, midstream financial results continued to be positive in the third quarter of 2020, with earnings largely meeting or exceeding consensus expectations. Additionally, revisions to forward EBITDA estimates for 2020 and 2021 continue to be minor compared with other energy sectors. Only two of the 34 reporting midstream companies have cut their dividend payments, while three have raised their payouts. But this stability in income and outlook contrasts starkly with the weakness in midstream equities this year, with the Alerian Midstream Energy Index down 27% since January. The response of the midstream industry has been to emphasize capital discipline and free cash flow generation that supports current generous dividends to reignite interest in the sector from a generalist investor base that has turned away from energy — a topic we covered recently in the blog, Look Into the Future.
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