East Daley Capital Advisors Inc. is forecasting an average 14% growth in earnings in the U.S. oil and gas sector this year for the 30 companies it covers from year to year.
And with that comes an opportunity to invest as more infrastructure is needed.
“I would say this is absolutely a good time to be looking as this space as a whole continues to grow and continues to need additional infrastructure to move that growth to market,” said Justin Carlson, who is vice president and managing director of research at Centennial, Colo.-based East Daley Capital.
While Carlson stops short of giving investment advice he does say that for certain companies the timing could be prosperous.
“There are good times coming but we have to be very cautious where investments are made because there are certainly more dynamic companies that are making strong investments that are in a better position,” he told Hart Energy. “Understanding the risk profile of the company you are investing in and also understanding their outlook for their projects and how they are positioned. It makes a difference to that investment.
“This is a situation where rising tides lift all ships to some extent but not all the same.”
According to the East Daley report, the surge in crude oil production in the Permian is providing a much-needed uplift for midstream companies. The companies that have benefited from the uptick include Plains All American Pipeline LP (NYSE: PAA), Enterprise Products Partners LP (NYSE: EPD) and Magellan Midstream Partners LP (NYSE: MMP).
This will be the second straight year of substantial growth after the midstream sector grew by 16% in earnings in 2017.
“The interesting thing about midstream is, despite the fact it has been growing in the double digits from a percent perspective for multiple years now, there has been a lackluster interest from a financial perspective, from an investment perspective,” Carlson said. “But from a growth perspective we are producing in growing production in the Permian along with others ... We are growing production everywhere and midstream companies are growing because of the supply to move the market.”
But that doesn’t mean there haven’t been some challenges. Despite the growth for midstream companies with natural gas in 2018, there have been delayed infrastructure projects in the Northeast and FERC’s recent announcement of changes in tax policies have pushed down some earning expectations. But Carlson said cash flows for 30 of the largest companies in the midstream industry are growing at 14% relative to last year.
So there is a need for new infrastructure to move oil and gas to market.
“The overall climate for investment has been pretty lackluster,” Carlson said. “The general retail investors have been turned off to the space because of that poor performance, because of some of the shakeups in regards to regulation, a slump in oil prices. We are getting to a point where we have constraints that are developing across the midstream space and constraints can only be alleviated by new infrastructure.
“The energy industry is cyclical from the standpoint of growth we are hitting a part of the cycle where we have a lot of new infrastructure is coming online and even areas where we are developing infrastructure. That’s where we are seeing a larger upside.”
Terrance Harris can be reached at tharris@hartenergy.com.
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