By Alex Kimani
- While oil pipeline capacity in the U.S. currently exceeds production, the country’s booming LNG and natural gas markets mean demand for infrastructure is soaring.
- The United States is projected to become the world’s largest exporter of LNG this year, and new LNG terminals and natural gas pipelines will be needed to continue this growth.
- Nearly all midstream companies in the U.S. are racing to take advantage of this opportunity, with new projects coming online and final investment decisions being made.
Over the past few years, dozens of U.S. midstream companies have set their sights on natural gas pipelines and export terminals as the U.S. natural gas and LNG markets explode while crude oil pipeline capacity continues to exceed production.
Natural gas projects are expected to be the fastest growing pipeline sector as production rises and shippers find new customers in Europe and Asia. Now, as analysts tell Reuters, it's all about boosting U.S. capacity and adding new pipelines to transport natural gas to LNG export terminals.
"Everybody has pretty much given up on ever doing another long-haul pipeline anywhere outside of Texas and, maybe, Louisiana," Bradley Olsen, lead portfolio manager for Recurrent Investment Advisors' midstream infrastructure strategy, has told Reuters.
Europe's natural gas demand has skyrocketed as the EU tries to lower its reliance on Russian natural gas following its invasion of Ukraine. Europe has displaced Asia as the top destination for U.S. LNG, and now receives 65% of total exports. The EU has pledged to reduce its consumption of Russian natural gas by nearly two-thirds before the year's end, while Lithuania, Latvia, and Estonia have vowed to eliminate Russian gas imports outright.
The European gas crisis has only deepened after Russia cut off the gas supply to Poland and Bulgaria, ostensibly for failing to pay for gas in roubles, sending European gas prices soaring. The move marks a ratcheting up of tensions and could reduce supplies to Europe, as many pipelines pass through Poland en route to the rest of the continent. Adding to supply woes, Russia's Nord Stream 1 pipeline that supplies Germany has gone offline for scheduled maintenance. While it partially resumed operations on July 21st, Europe feared that it could be delayed for political leverage.
Not surprisingly, Europe has become the top importer of U.S. LNG, taking about 65% of U.S. exports.
The U.S. Energy Information Administration (EIA) has forecast that the United States will surpass Australia and Qatar to become the world's top LNG exporter this year, with LNG exports continuing to lead the growth in U.S. natural gas exports and average 12.2 billion cubic feet per day (Bcf/d) in 2022. The United States currently ranks second in the world in natural gas exports, behind only Russia.
According to the EIA, annual U.S. LNG exports are set to increase by 2.4 Bcf/d in 2022 and 0.5 Bcf/d in 2023. The energy watchdog has forecast that natural gas exports by pipeline to Mexico and Canada will increase slightly, by 0.3 Bcf/d in 2022 and by 0.4 Bcf/d in 2023, thanks to more exports to Mexico.
In contrast to natural gas, crude oil pipeline capacity continues to far exceed production. Currently, there are ~8 million barrels per day of Permian crude pipeline capacity, significantly more than the 5.5 million bpd of production, according to EIA and Morningstar figures.
Natural Gas and LNG Projects
The pivotal Permian Basin is preparing to unleash a torrent of gas and gas projects to meet exploding LNG and natural gas demand - coming just in time, given that limited takeaway capacity is expected to start being keenly felt in 2023, which could lead to negative pricing in the basin.
Energy Transfer (NYSE:ET) is looking to build the next large pipeline to transport natural gas production from the Permian Basin. Energy Transfer has also started building the Gulf Run pipeline in Louisiana to move gas from the Haynesville Shale in Texas, Arkansas, and Louisiana to the Gulf Coast.
Energy Transfer is expected to report Q2 earnings on 3rd August 2022. The consensus EPS forecast for the quarter, based on five analysts as per Zacks Investment Research, is $0.28 compared to $0.20 for last year's corresponding period.
Back in May, a consortium of oil and natural gas firms, namely WhiteWater Midstream, EnLink Midstream (NYSE:ENLC), Devon Energy Corp. (NYSE:DVN), and MPLX (NYSE:MPLX) announced that they had reached a final investment decision (FID) to move forward with the construction of the Matterhorn Express Pipeline after having secured sufficient firm transportation agreements with shippers.
According to the press release:
"The Matterhorn Express Pipeline has been designed to transport up to 2.5 billion cubic feet per day (Bcf/d) of natural gas through approximately 490 miles of 42-inch pipeline from Waha, Texas, to the Katy area near Houston, Texas. Supply for the Matterhorn Express Pipeline will be sourced from multiple upstream connections in the Permian Basin, including direct connections to processing facilities in the Midland Basin through an approximately 75-mile lateral, as well as a direct connection to the 3.2 Bcf/d Agua Blanca Pipeline, a joint venture between WhiteWater and MPLX."
Matterhorn is expected to be in service in the second half of 2024, pending regulatory approvals.
WhiteWater CEO Christer Rundlof touted the company's partnership with the three pipeline companies in developing "incremental gas transportation out of the Permian Basin as production continues to grow in West Texas." Rundlof says Matterhorn will provide "premium market access with superior flexibility for Permian Basin shippers while playing a critical role in minimizing flared volumes."
Matterhorn joins a growing list of pipeline projects designed to capture growing volumes of Permian supply to send to downstream markets.
Early this month, WhiteWater revealed plans to expand the Whistler Pipeline's capacity by about 0.5 Bcf/d, to 2.5 Bcf/d, with three new compressor stations.
Source: Natural Gas Intelligence
Although the companies have not divulged the cost and revenue estimates of the Matterhorn, a project of that magnitude is likely to provide years of predictable cash flows to these producers--which, incidentally, are all high-dividend payers.
Oklahoma-based Devon, one of the Permian's top producers, recently said it expects Permian production to reach nearly 600,000 boe/d in the second quarter. The new pipeline will help support the company as it increases its production in the Permian in the coming years. DVN stock currently yields (Fwd) 7.3% and has returned 54.3% year-to-date.
MPLX has several other expansion projects under construction. The company says it expects to finish construction on two processing plants this year, and recently reached a final investment decision to expand its Whistler Pipeline. MPLX stock yields a juicy 9.2% (Fwd), but the stock has only managed a 2.1% YTD return.
Devon Energy is expected to report Q2 2022 earnings on August 1 2022. The company is expected to report EPS of $2.29, good for 281.67% Y/Y growth. Enlink will report on 3rd August 2022 with consensus EPS being $0.06 vs. $-0.04 for last year's comparable quarter, while MPLX LP is expected to do so on 2nd August, 2022, whereby it has a consensus EPS of $0.82 compared to $0.66 a year ago.
Meanwhile, EnLink's cash flow has been rising thanks to higher commodity prices. The company has increased its capex range from $230 million-$$260 million up to $280 million-$310 million, which should drive growth in the near-term.
Back in May, Kinder Morgan (NYSE:KMI) subsidiary launched an open season to gauge shipper interest in expanding the 2.0 Bcf/d Gulf Coast Express Pipeline (GCX).
Meanwhile, KMI has already completed a binding open season for the Permian Highway Pipeline (PHP), with a foundation shipper already in place for half of the planned 650 MMcf/d expansion capacity.
On Wednesday, KMI reported Q2 Non-GAAP EPS of $0.27, beating by $0.01; GAAP EPS of $0.28 was in-line while revenue of $5.15B (+63.5% Y/Y) beat by $1.34B.
For the full FY 2022, KMI expects to generate net income of $2.5B and declare dividends of $1.11 per share, a 3% increase from the 2021 declared dividends.
In the LNG space, in May, the U.S. Department of Energy authorized additional LNG exports from the planned Golden Pass LNG Terminal in Texas and Magnolia LNG Terminal in Louisiana as the U.S. seeks to boost LNG exports to Europe.
Jointly owned by Exxon Mobil (NYSE:XOM) and Qatar Petroleum, the $10B Golden Pass LNG export project is expected to become operational in 2024, while Magnolia LNG, owned by Glenfarne Group, will come online by 2026. The two terminals are expected to produce more than 3B cf/day of natural gas, although Magnolia is yet to sign contracts with customers.
Previously, American LNG developers were unwilling to construct self-financed liquefaction facilities that are not secured by long-term contracts from European countries. However, the Ukraine war has exposed Europe's soft underbelly and the harsh reality is forcing a rethink of their energy systems. To wit, Germany, Finland, Latvia, and Estonia recently expressed the desire to move forward with new LNG import terminals.
Exxon is slated to report Q2 earnings on July 29 whereby the United States' largest independent oil company is expected to post EPS of $3.41 per share, reflecting a year-over-year increase of 210%.
In May, the DoE approved expanded permits for Cheniere Energy's (NYSE:LNG) Sabine Pass terminal in Louisiana and its Corpus Christi plant in Texas. The approvals allow the terminals to export the equivalent of 0.72 billion cubic feet of LNG per day to any country with which the United States does not have a free trade agreement, including all of Europe. Cheniere says the facilities already are making more gas than is covered by previous export permits.
Cheniere is expected to report Q2 earnings on August 4, with EPS expected to clock in at $2.76, good for a 411.11% Y/Y increase.