The bloodletting resumed in the midstream space on Monday as the market appears to still be wrestling with the downside from the new proposed and ruled tax policies from the FERC. However, East Daley analysis indicates that the market misunderstands how these new policies will impact future midstream company performance.
Centennial, CO – March 20, 2018 – East Daley Capital Advisors, Inc., an energy assets research firm redefining risk assessment for midstream energy companies, is cautioning investors in midstream oil and gas companies to look closely at the details of the new FERC rulings and how those rulings apply to specific assets in midstream companies to properly evaluate risk. East Daley analysis indicates that the market is having difficulty quantifying how these recent changes will impact company performance.
“One example of the facts not matching market sentiment is Energy Transfer Partners, which has seen unit prices drop 8.54% over the past three trading days,” said Justin Carlson, VP and Managing Director, Research at East Daley Capital. “Energy Transfer Partners has minimal exposure to rates reductions due to the decrease and elimination of the income tax allowance. East Daley analysis indicates that only 4.2% of total company EBITDA is exposed to max tariff rates with only Panhandle and Florida Gas Transmission having significant exposure. Moderate decreases in rates on both Panhandle and Florida Gas Transmission would have nonmaterial impacts on total company EBITDA for Energy Transfer Partners, yet their unit prices have suffered.”
Last Thursday, FERC ruled on two significant regulations regarding cost-of-service calculations. The first will disallow master limited partnership (MLP) interstate natural gas and oil and pipelines to recover an income tax allowance in cost of service rates, which will prevent the “double recovery” of taxes by the MLP. The second requires natural gas pipelines, weather under the MLP or C-corp structure, to file a one-time report on the rate effect of the new tax law and changes to the Commission’s income tax policies. Since the FERC announcements, most midstream companies have seen their unit prices drop substantially.
“Also interesting is that Kinder Morgan has fared better compared to the rest of the midstream space, only losing 2.56% over the last three trading days,” said Carlson. “The outperformance is interesting compared to others such as Energy Transfer, given our adjusted return on equity calculations that show several of their large pipelines may be overearning. Kinder Morgan pipelines have a significant portion of their EBITDA protected via negotiated contracts, however, there would still be earnings headwinds if max tariff rates were cut on large earning pipelines like El Paso and Tennessee Gas.”
East Daley’s analysis on the impacts of the new tax laws on the midstream sector is detailed in a new report titled “Dirty Little Secrets – The Naked Truth: Uncovering Opportunities in the Midstream Sector.” The report analyzes the ROE for over 40 natural gas pipelines, indicating that half of those pipelines are at risk to lower rates over the next few years via FERC action.
East Daley’s largest asset database of U.S. energy infrastructure and patent-pending production allocation model, combined with in-depth analysis, brings greater transparency to the midstream energy financial market by providing investors and market participants with deeper, more accurate data to inform their investment and strategy decisions.
About East Daley Capital Advisors, Inc. is an energy assets data and analysis research firm that is redefining how markets view risk for midstream and exploration and production (E&P) companies. In addition to using top-level financial data to predict a company’s performance, East Daley delivers asset-level analysis that provides comprehensive, fact-based intelligence. Supported by a team of unbiased, experienced research analysts, East Daley provides its clients unparalleled insight into how midstream and E&P companies operate and generate cash flow. East Daley uses publicly available fundamental data and intersects that data with a company’s reported financials to asset-level adjusted-EBITDA and distributable cash flow (DCF). The result allows for more informed portfolio decisions. Founded in 2014, the company is based in Centennial, Colorado. For more information visit http://www.eastdaley.com.