Midstream Values Still Exist
With challenging industry fundamentals, investors will need to play defense.
We continue to recommend that midstream investors play defense, as industry fundamentals are looking challenged. As we have listened to management teams discuss recent performance this earnings season, as well as their near- to medium-term outlooks for their firms, several themes have recurred.
First, balance sheets are getting stretched, with net debt/EBITDA at many midstream firms picking up. Cash distribution coverage levels are getting tighter, with some firms unable to reach 1.0 times coverage, including Plains All American Pipeline (PAA), Kinder Morgan (KMI), and ONEOK Partners (OKS). Cash distribution growth rates are likewise coming down, most recently for Kinder Morgan. Several firms have cut capital expenditure plans for next year, and we believe this is only the beginning as management teams begin working on 2016 budgets. Some discussed potential noncore asset divestitures as a means to shore up balance sheets, while those who had expected growth to come from acquisitions have been disappointed as bid and ask prices remain far apart in most cases. As a result of these challenges, many firms--including Kinder Morgan and Plains All American--are now considering alternative financing to underpin growth plans.
Peggy Connerty does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.