- The US has become an important global supplier of liquefied natural gas (LNG) and natural gas liquids (NGLs), creating opportunities for midstream companies.
- M&A could continue to play an important role in the midstream space through non-core divestitures, asset tuck-ins, and renewable energy projects.
- The Inflation Reduction Act (IRA) enhances the opportunity set for midstream companies to pursue projects related to carbon capture, hydrogen, and renewable fuels.
Last week we attended the Energy Infrastructure Council’s 20th annual Energy Infrastructure CEO & Investor Conference in Florida. Key themes included opportunities related to natural gas, increased M&A activity, and the role of midstream in the energy transition. This note discusses key takeaways from the conference around these growth avenues for midstream/MLPs. To be clear, companies are expected to continue to take a disciplined approach to growth. Growth capital spending is expected to stay well below the peak spending levels seen before the pandemic, and returning cash to shareholders is expected to remain a key priority.
Natural gas infrastructure along the Gulf Coast set to expand.
The strong international demand for US LNG and NGLs has helped accommodate notable production growth, which results in more volumes for midstream to handle. US marketed natural gas production has increased by more than 10 billion cubic feet per day or 11.3% from January 2021 to April 2023 according to the Energy Information Administration. Meanwhile, NGL production has increased by 0.9 million barrels per day (MMBpd) to 6.1 MMBpd (+17.2%) over that same timeframe, with another 0.2 MMBpd of growth anticipated by year-end 2024.
US natural gas production may soften in the near term as companies lay down rigs in response to low prices. However, the long-term outlook for US natural gas production remains very constructive due in part to growing LNG export capacity set to come online over the next few years (read more). Both expansion and new build projects are slated for the US Gulf Coast. This has resulted in a number of pipeline opportunities from the Haynesville to the Texas/Louisiana coast (read more). Additional natural gas takeaway capacity from the Permian to the Texas Gulf Coast is also in the works (read more).
Natural gas liquids (NGLs) are another important growth driver for midstream. Growing domestic and international demand for NGLs like ethane and propane is also contributing to infrastructure investment along the Gulf Coast. Several midstream companies are constructing new facilities to process NGLs at Mont Belvieu, Texas. Companies have also announced expansion projects for NGL export facilities in Texas as well (read more).
Asset-level M&A likely to continue.
The midstream space could see a reshuffling of assets over the next few years as public companies shed non-core operations and pursue bolt-on acquisitions. Improved balance sheets and solid free cash flow generation may facilitate more deals in the space. Permitting challenges in some areas have also made developed infrastructure assets more appealing. On the other hand, higher interest rates for deals financed with debt and more regulatory scrutiny of consolidation could present obstacles.
M&A activity picked up in 2022 after a pandemic-driven slowdown in 2020 and 2021, with companies consolidating their interests in certain assets and growing their footprints in basins with existing operations (read more). Add-ons that are immediately accretive to cash flows or assets in basins where organic growth would be difficult are expected to be more desirable.
Consistent with activity seen in recent years, midstream companies may be willing buyers of assets from private equity as firms exit investments. These opportunities may include gathering and processing assets or even renewable energy projects, such as those focused on renewable natural gas (read more). Credits and incentives included in the IRA may enhance the desirability of pursuing clean energy projects given improved economics.
The IRA could incentivize midstream to do more in the clean energy arena.
The IRA, which was passed in August 2022, included provisions that are aimed at advancing alternative energy opportunities and carbon capture. There are several new or enhanced tax credits that incentivize these activities. Accounting firms at the conference were quick to highlight that some details regarding IRA tax credits are still being sorted. However, midstream/MLPs stand to benefit from these incentives directly or indirectly (read more).
Midstream corporations and MLPs have transferrable expertise in the storage, transportation, and processing of molecules. Moving captured carbon dioxide to storage sites, developing hydrogen hubs, producing or transporting renewable natural gas, and storing and transporting renewable fuels are just some examples of the opportunities for energy infrastructure companies. Even as the energy landscape changes over time, midstream is likely to play an important role in handling energy and byproducts like carbon dioxide for years to come.
The utility of midstream’s expertise and assets is evident in partnership announcements over recent years. Integrated majors, energy technology companies, and oil and gas producers have partnered with midstream for various opportunities related to carbon capture, hydrogen, and renewable fuels (read more). Importantly, midstream may be able to leverage its existing assets in some cases. As a partner, midstream companies bring existing assets and expertise, as well as strong balance sheets. Some midstream companies can provide capital as a JV partner or investor.
Midstream corporations and MLPs are likely to see additional growth opportunities related to LNG, NGLs, asset-level M&A, and clean energy initiatives. With a strong financial position and existing expertise, midstream/MLPs can attract and execute on these opportunities.
For more news, information, and analysis, visit the Energy Infrastructure Channel.