The midstream entered 2020 after a tough stretch. It’s a challenge to any business when your customers—the E&P sector in this case—struggle. But here’s hoping that investors begin to see midstream as a different type of investment worthy of consideration.

Midstream stocks got sucked down with their upstream brethren, although the businesses are fundamentally different. I’ve made this point in several conversations with non-energy friends recently. I’ve used the toll road analogy—something U.S. motorists seem to increasingly encounter—to make the point that midstream operators have a smoother revenue stream. Regardless of a commodity’s price, the midstream receives revenue at its toll booth whenever that commodity moves from A to B.

Stock trends have switched the overall energy industry’s investment rationale from growth to value.

Beat-down shares offer strong growth potential. Many midstream analysts have hopes that Wall Street will start to mull the midstream once again, this time as a value opportunity.

Christopher Sighinolfi, midstream equity analyst at Jefferies LLC, headlined a research report “Value So Nice, Worth Looking Twice” as the year began.

“While E&P developments may continue to shape sentiment, we see compelling midstream value amid declining leverage, moderating capex, escalating free cash flow, insider buying, and 3rd-party M&A …” he said. Sighinolfi goes on to point out midstream capex demands this year will decline—and that will help results.

“We also find it constructive that, with reduced E&P activity and the pending completion of large, longer lead-time projects, total capital expenditure across our midstream coverage is poised to decline ~21% year-over-year in 2020 and a further >30% in 2021, aiding returns (return on invested capital and return on equity), free-cash-flow generation, and continued leverage moderation,” he added. “We believe ongoing leverage reductions will give investors greater confidence in the sustainability of equity payouts, perhaps returning income-oriented investor interest in the group.”

Speaking of income, MarketWatch columnist Philip Van Doorn published a list of 28 stocks that he rated tops in dividend potential this year. Four firms on the list, The Williams Cos. Inc., Archrock Inc., Valero Energy Corp. and Marathon Petroleum Corp., have significant midstream exposure. Other energy-related names included Schlumberger NV, Baker Hughes Co., Halliburton Co. and ConocoPhillips. Full disclosure: I own Williams and ConocoPhillips shares.

Given slumping business conditions, maintaining high dividends can challenge management. EnLink Midstream LLC recently cut its dividend to an annualized 75 cents per unit, but Sunil Sibal, senior analyst at Seaport Global Securities LLC, noted the move “allows EnLink to be free-cash-flow positive in 2020. The dividend cut was largely expected, and the update was viewed in a positive light by the equity investors and is also incremental positive for credit, especially with 2020 EBITDA guidance mid-point also coming in ~2.5% ahead of consensus.”

We focus this issue on one of the most promising areas for the sector: exports. The changing flow of the products midstream handles is an exciting challenge—and a very dramatic one. The U.S. Energy Information Administration (EIA) pointed out in its January Short-Term Energy Outlook that the nation has been a net exporter only since last September. But it expects the trend to continue well into the new decade.

“EIA forecasts that the United States will be a net exporter of total crude oil and petroleum products by 0.8 million barrels per day (MMbbl/d) in 2020 and by 1.4 MMbbl/d in 2021,” the EIA report said.

The sector faces multiple other issues, and we will continue to do our best to provide insights and commentary. One major development worth noting occurred in late in 2019 and might clarify the land covenant issue that emerged in the 2016 Sabine bankruptcy. A Colorado court handling the Badlands Energy bankruptcy seems to have upheld the precedent that land dedications are real property, not executory contracts to be shed in a restructuring. That could be a plus for midstream operators. It will be interesting to see what happens next on this important issue.

Separately, I want to welcome back to these pages our Regulatory Review feature written by Matt Hite, vice president of government affairs for the GPA Midstream Association. It’s an election year, and I welcome his insights on what’s happening in Washington

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