Midstream Weekly Recap: Permian Oil Production Is Increasing

Midstream Weekly Recap: Permian Oil Production Is Increasing

Joey Ingelhart/E+ via Getty Images

Midstream Sector Performance

Oil and gas commodities held strong during a week of turmoil for equities. WTI traded 2.6% higher during the week, as the prospect of an EU embargo on Russian crude and reports of Russian production losses offset the demand impact from Chinese lockdowns. Natural gas prices traded 12.6% higher as European nations seek to replenish their inventories before winter.

index performance

HFI Research

Despite the commodity price strength, midstream was pulled lower as the S&P 500 fell 3.3%. The Alerian MLP Index underperformed and was down 4.1%, even though fundamentals continue to trend positively for the sector.

For the second week in a row, an equity we recently recommended was the top performer in the sector. Last week, it was Blueknight Energy Partners (BKEP), which agreed to be bought out by its sponsor, Ergon. This week, it was USD Partners (USDP), which we recommended at $6.00 in a writeup published on Tuesday. USDP units were up 8.3% during the week and closed at $6.53. We were too slow to buy it for our portfolio, so we missed the week’s rally. We hope to open a position if it pulls back.

The biggest fundamental news for oil and gas midstream during the week was the announcements by several E&Ps that they were stepping up domestic production. Chevron (CVX), Continental Resources (CLR), and Hess (HES) all discussed plans to increase shale output during their first-quarter earnings calls. CVX intends to increase its Permian production by 15%. CLR guided for a 27% increase in oil production. And HES is considering adding an additional rig to its Bakken acreage. HES has targeted 200,000 boepd from its Bakken acreage, 32% higher than the 152,000 boepd it averaged during the first quarter.

The announcements are consistent with our own read on domestic production, which we saw tick higher over the past few weeks.

HFI research real-time us oil production tracking

HFI Research

These announcements are bullish for our gathering and processing (G&P) operators-though you wouldn’t know it from this week’s performance of their equities. The news supports our long-held thesis that U.S. oil production would deliver an outsized benefit to these companies relative to their long-haul pipeline peers. We invested half our portfolio based on this thesis.

As we expected, the Permian Basin will be the go-to destination for E&Ps looking to increase production. We expect more E&Ps to announce Permian production increases in their first-quarter earnings conference calls.

Well-positioned Permian G&Ps have room to run to the upside from increasing production. The Delaware Basin in particular has seen a surge in production, as shown in the remarkable strength of New Mexico oil production.

New Mexico oil production

EIA

We expect increased throughput to translate into higher free cash flow and distributions over the coming quarters for our holdings Western Midstream Partners (WES), Targa Resources (TRGP), EnLink Midstream (ENLC), and Kinetik Holdings (KNTK), whose respective Delaware Basin G&P footprints are shown below.

Western Midstream Permian Footprint

Western Midstream Permian Footprint

Western Midstream Partners LP

Targa Resources Permian Footprint

Targa Resources Permian Footprint

Targa Resources

EnLink Midstream Permian Footprint

EnLink Midstream Permian Footprint

EnLink Midstream

Kinetik Holdings Permian Footprint

Kinetik Holdings Permian Footprint

Kinetik Holdings

We believe this week’s selloff provides an attractive opportunity to buy these four G&P equities for long-term holding.

Weekly HFI Research MLPs Portfolio Recap

Our portfolio got walloped with the rest of the sector, underperforming its benchmark, the Alerian MLP Index, by 0.7%. G&Ps led the way lower, with Targa Resources (TRGP), Western Midstream (WES), Plains All American (PAA), and EnLink Midstream (ENLC) all down more than 4%.

Table

HFI Research

Martin Midstream Partners (MMLP) was hammered, falling 17.4% after having staged a ferocious rally over the past few months.

After several weeks in which numerous holdings featured among the top ten performers in our coverage universe, this week, four of our holdings made the bottom ten.

Chart

HFI Research

On the positive side, Kinetik Holdings (KNTK) bucked the trend among G&Ps and traded higher on no fundamental news, though the units were initiated at Buy at Mizuho. Black Stone Minerals (BSM) also traded higher after announcing a $0.40 per unit first-quarter distribution, 48% higher than the fourth-quarter 2021 distribution. BSM management continues to execute superbly for unitholders.

Fortunately, six of our holdings rank among the top ten year-to-date gainers in the midstream sector.

Chart

HFI Research

We aren’t concerned about this week’s big declines among our holdings. They were pulled lower by a violent, market-wide “risk-off” macro move and not by any fundamental deterioration. In fact, as noted in our discussion above, we believe G&P fundamentals are lining up particularly well as U.S. production marches higher over the coming quarters and years.

As for MMLP, we believe a refinancing of its senior notes is imminent in the second half, which should substantially de-risk the company for equity owners. We recommend MMLP and all our G&P holdings as long-term “Buys” at current prices. However, buyers of these equities should expect continued volatility-both up and down-amid capital markets and oil market turbulence.

News Of The Week

April 27. Magellan Midstream (MMP) launched an open season to gauge customer interest in pipeline capacity for its refined products system that runs from Houston to El Paso, Texas. The expansion would increase a portion of MMP’s pipeline by 15,000 bpd, to 85,000 bpd. It would be a capital-efficient way for MMP to build out its high-return refined product assets. We believe recent macro developments have exposed the reality that any transition away from fossil fuels is a long-term proposition. As such, we believe well-positioned operators of refined product assets such as MMP will benefit for years-perhaps decades-into the future. We therefore recommend MMP units as a “Buy.”

April 28. EQT Corp. (EQT), the biggest natural gas producer in the U.S., may acquire an equity stake in an LNG export project. CEO Toby Rice stated on EQT’s first-quarter earnings conference call that EQT is seeking access to foreign natural gas markets, which will allow it to capture stronger margins between relatively low U.S. natural gas and higher global prices. EQT plans on signing a deal similar to the agreements that APA Corp. (APA), EOG Resources (EOG), and Tourmaline (OTCPK:TRMLF) struck with Cheniere Energy (LNG). EQT’s announcement underscores the capability and willingness of U.S. natural gas producers to supply global markets. We hold Cheniere stock and believe it remains the most conservative way to play the booming LNG trade.

April 28. California’s Attorney General Rob Bonta has launched an investigation into oil and gas companies for their role in “the global plastics pollution crisis.” The attorney general claims that the companies knowingly spread misinformation to the public and that by doing so, they have harmed people and the environment. His office issued a subpoena to Exxon Mobil (XOM). The attorney general is focusing on the harms caused to Californians and the contributions to the climate crisis allegedly perpetrated by plastics manufacturers, apparently without regard for their places of operation. He cited this study with the claim that XOM “accounts for more single-use plastic waste than any other company.” We don’t expect a material adverse outcome to XOM or other oil and gas companies from this action, but it indicates that targeting oil and gas companies remains a popular political tactic, even amid a global oil and gas supply crisis. We believe major midstream companies active in the Gulf Coast petrochemical complex, such as Enterprise Products Partners (EPD), may find themselves in the crosshairs of such investigations in the future.

Capital Markets Activity

None.

Table

HFI Research

Originally Posted on: https://seekingalpha.com/article/4506327-permian-oil-production-is-increasing-and-these-will-benefit?source=feed_tag_commodities
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