East Daley Analytics raised our outlook for Midcontinent Express Pipeline (MEP) after the pipeline successfully resigned capacity under short-term contracts that expired last quarter.
In November and December ‘23, MEP signed 30 new contracts to replace a large earnings stream that had rolled off, avoiding a potential contract cliff. EDA previously had risked the capacity for the pipeline owned by Kinder Morgan (KMI) and Energy Transfer (ET). We increased the 2024 EBITDA forecast for MEP by $54MM, or $27MM each to KMI and ET In the company Financial Blueprints.
MEP caught the eye of analysts in 4Q22 when regional price spreads blew out on the Gulf Coast, prompting shippers to sign 1.1 Bcf/d of short-term contracts. MEP revenue more than doubled to ~$60MM vs 11 prior quarters under $30MM, and revenue stayed north of $70MM in the first three quarters of 2023. EDA had been reluctant to change our long-term outlook for MEP since most of the contracts were expiring in November ‘23, and 75% of the capacity was taken by marketers such as Citadel, Total, and Freepoint.
These shippers profited from the wide spread between Anadarko Basin and Southeast market prices. The spread from NGPL-TXOK to delivery at Transco Station 85 averaged nearly $1/MMBtu from September ‘22 to January ’23 (see price chart). As the regional spread considerably narrowed in February ‘23, EDA speculated that the contracts would not renew, reducing MEP’s quarterly revenue by ~$33MM.
Instead, MEP signed 30 new contracts at a lower average rate, replacing the revenue stream that had rolled off. The pipeline picked up significant contracts from TC Energy Marketing, Trafigura, and Vitol. The new contracts have a weighted average rate of $0.44/Dth/day.
While the spread between NGPL-TXOK and Transco 85 narrowed from February to June ‘23, it has since expanded to $0.52/MMBtu in the six months since June 2023 (shown in the chart). The wider spread has supported more contracting.
The new negotiated rates allow MEP to keep the pipe full while marketers can still profit from price volatility. The new contracts have an average term of about two years, providing a healthy short-term outlook for MEP. Clients can review our revised MEP forecast and other quarterly updates in the recently updated KMI Financial Blueprint. – Zach Krause Tickers: ET, KMI.
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