Oscars Season? Meet Guidance Season … and the Winner is?

I watch a lot of movies.  In fact, right now I am writing this while trying to finish “Killers of the Flower Moon” —all 3 hours and 25 minutes of it. In thinking about it, midstream is a little like the film industry, in that there are cinephiles who care deeply about films that the rest of the world doesn’t have much time for. Midstream is a niche area of focus for investors, getting more niche each year. 

In the film world, there are a few films each year that cross over and have critical acclaim and massive box office results. Like this year, there were two likely (as of this writing) Best Picture nominees that were also in the top 5 highest grossing films of 2023: “Barbie” (highest worldwide gross at $1.4 billion) and “Oppenheimer” (3rd highest at $952 million). 

Betting odds in early January have Oppenheimer as the favorite, but the next two best odds are “Poor Things” and “The Holdovers,” which combined for a box office gross totaling just $43 million.

If “Oppenheimer” wins, it will be the highest grossing Best Picture winner since 2003, when “Lord of the Rings: Return of the King” won. The combination of box office success and critical acclaim has always been rare, but even less frequent in the last 20 years because of box office dominance by superhero or franchise films. 

When it comes to the stock market, superhero films are like growth stocks, dominating the market’s attention and hoovering up all the fund flows. Midstream stocks are more niche, akin to the more typical Oscar-bait films that a small, but dedicated group obsess over and talk about on podcasts. 

Lately, however, Marvel movies, “Star Wars” sequels and the like have bombed, failing to garner nearly as much interest as they once did.  It was a good run for Marvel movies, and it continues to be a good run for growth stocks.  However, the appeal of the niche midstream sector could take center stage in 2024. 

Midstream performed well in a year with falling commodity prices and limited prospects for top line growth, which is unusual. In years past when commodity prices have fallen so much (like in 2015 and 2020), midstream followed energy stocks lower. 

This time that didn’t happen, probably on account of improved balance sheets and free cash flow that allow for financial flexibility to better weather uncertain times like these. High free cash flow and recent lower correlation to oil prices could attract broader market interest in midstream in 2024, making the sector a crossover hit like “Oppenheimer.” Or the sector could continue to thrive in obscurity like so many Oscar films do.

Awards guidance

I considered trying to come up with a list of awards and giving them out to individual midstream companies, like Targa Resources (TRGP) could be Best Picture, Cheniere Energy CEO Jack Fusco could be Best Director, and so on.  Maybe Energy Transfer (ET) could win best adapted screenplay for running the same play it did with Enable Midstream a few years ago, but this year with Crestwood Equity (CEQP).  Williams Cos. (WMB) and Enbridge (ENB) could win Best Costume Design for dressing up flagging growth with splashy M&A.

But I didn’t get very far, because that’s all backward-looking, and we’ve dwelled on that plenty at this point. First quarter earnings are about forward guidance, the future winners of such awards.  Is this the year Canadian midstream stocks outperform after several years of trailing midstream returns? Probably so if interest rates decline, but not if times get tough and high leverage weighs. Will ONEOK outperform the market’s sanguine view of synergies from the Magellan merger? Perhaps. Will companies keep buying assets from private equity rather than buy back their own shares?  Probably.

Other themes in the coming year that will drive investment discussions as midstream companies push forward with a fresh year of guidance:

• Return of capital decisions, which lately has been more directed towards M&A, capital investments and dividends over buybacks;
• Elevated capex to facilitate NGL volumes flowing from those plants down the value chain and into the export market; and
• Weakness in commodity prices impacting volumes and demand.

Those themes are fairly evergreen in midstream, which is a credit to a sector that’s returned to its roots of being boring and beautiful. One area that could continue to change is investments in ESG, green or sustainable assets, like carbon capture, renewable natural gas and hydrogen. I expect those investments to continue to slow. The technologies are too nascent and the scale too small to continue to garner much attention from midstream companies.  

In memoriam

Finally, sticking with the Oscar theme, it is time for the “In Memorium” portion of the show.

Since COVID, the midstream sector has lost many once-proud companies. They went away in the name of synergies, selling out, efficiency, etc.  In the past 12 months alone, we lost the following MLPs: HEP (2004-2023), DCP (2005-2023), MMP (2001-2023), CEQP (2011) and GPP (2015-2024).

Since 2020, in addition to the five lost in 2023, 12 other MLPs have gone away, including CNXM, BPMP, ENBL, EQM, NBLX, OMP, PBFX, PSXP, SHLX, SRLP, TCP and RTLR.  These MLP tickers and most of their management teams are gone, but their assets live on within their original sponsors or as part of other, larger midstream companies.

Hinds Howard is a portfolio manager at CBRE Investment Management where he evaluates listed energy infrastructure and transportation companies in North America and coordinates research of listed transportation companies globally. He is based in Wayne, Pennsylvania.