The Daley Note: October 25, 2023
The Midcontinent Express Pipeline (MEP) has had a great run of late for owners Kinder Morgan (KMI) and Energy Transfer (ET), thanks to rapid supply growth and some mistimed outages. But East Daley expects outperformance to end for MEP as several contracts near expiration, according to contract data in Energy Data Studio.
KMI and ET outperformed EDA’s expectations in the company Financial Blueprints back in 1Q23, in part due to their joint ownership in MEP. Fast-forward to 3Q23, and KMI continues to report increased earnings from MEP relative to performance a year ago.
How did a pipeline that has historically been a drag on segment earnings turn into a driver of growth? The answer: marketing opportunities. As regional spreads blew out between the Midcontinent and Gulf Coast regions, marketers such as Citadel, Total, and Freepoint took out short-term contracts on MEP to trade the spread between the Transco Zone 85 and NGPL-TXOK price points.
EDA previously reviewed how Midcontinent Express became a star pipe performer. Haynesville gas production has been growing rapidly since 2022 in East Texas and Louisiana. This supply growth, combined with an eight-month outage at the Freeport LNG facility, caused gas supply to back up in South and East Texas, reflected in depressed prices at the Carthage hub. The gas glut caused NGPL-TXOK prices to trade far below the Transco Zone 85 downstream point on MEP starting in 4Q22, creating a profitable spread (see chart).
Although the term of the marketing contracts on MEP extend for a year, the spread between Transco Zone 85 and NGPL-TXOK collapsed back below $1.00/MMBtu as Freeport LNG restarted and Haynesville growth has cooled. With this tailwind gone, East Daley does not expect these short-term contracts to renew.
After several impactful quarters of outperformance, East Daley believes MEP’s run of profit came to an end in 3Q23. Using our Shipper Contract screen in Energy Data Studio, we know many of the contracts taken out by marketers back in November 2022 expire in October ’23, or the end of this month (see chart).
East Daley nearly hit 3Q23 earnings on the nose in our KMI Blueprint last week. Kinder Morgan reported Adj. EBDA of $1,835MM, 0.2% above our forecast. EDA sits 4% below consensus in our 4Q23 outlook for KMI, in part due to the earnings inflection for MEP. – Zach Krause Tickers: ET, KMI.
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