With the release of quarterly earnings from Equitrans Midstream (ETRN) and EQM Midstream (EQM) this morning, energy infrastructure’s 1Q20 earnings season has all but come to a close with only a few names left to report results. Guidance updates along with management commentary have helped paint a clearer picture of expectations for midstream cash flows in a challenging macro environment. As we discussed recently, analyst revisions to EBITDA forecasts have been modest for energy infrastructure companies when compared to the broader energy sector (read more), reflecting the resiliency of their fee-based business model (read more). The chart below provides an update on index-level EBITDA consensus forecast revisions from January 31 to May 11 (i.e. since oil prices collapsed), comparing midstream with the broader energy sector, as represented by the S&P Energy Select Sector Index (IXE), and exploration and production (E&P) companies, as represented by the S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOP). Given that earnings season for midstream and the rest of energy has largely concluded, forecasts should now be more reflective of updated company outlooks. Current EBITDA estimates for the Alerian Midstream Energy Select Index (AMEI) are mostly flat compared to estimates prior to the collapse of oil prices, while Alerian MLP Infrastructure Index (AMZI) estimates for 2020 and 2021 EBITDA have only seen modest downward revisions of 5.9% and 10.0%, respectively. This contrasts sharply with AMEI and AMZI’s year-to-date total returns of -36.1% and -42.3% through May 13. Comparatively, 2020 EBITDA projections for the IXE Index have been nearly cut in half, while E&P EBITDA estimates for both 2020 and 2021 have been lowered by over 50%. On a total-return basis, IXE has fallen -39.4% this year, and SPSIOP has declined by -49.1%.
Recent guidance updates from midstream companies have mirrored this relative stability, with several names maintaining or slightly adjusting full-year estimates (read more). Aggregating 2020 EBITDA guidance updates from 23 MLPs and C-Corps, the average downward revision to 2020 EBITDA guidance was 9.0%, and the median revision was 7.8%. Cheniere Energy (LNG), Pembina Pipeline (PBA/PPL CN), and Williams (WMB) all restated prior EBITDA guidance alongside their 1Q20 earnings reports. After forecasting no change to its initial EBITDA guidance in its March 17 presentation, Energy Transfer (ET) lowered its full-year EBITDA expectations to $10.7 billion at the midpoint earlier this week. This represents a 4.5% downward revision from the midpoint of initial guidance. Management also noted that it expects 90-95% of 2020 EBITDA to be driven by fee-based contracts, further underscoring cash flow stability. The partnership continues to target positive free cash flow after its distribution in 2021 driven by project completions and a decline in growth capital spending. ETRN stands alone as the only midstream company to raise prior EBITDA projections. This morning, ETRN updated its 2020 financial expectations, which included increasing its full-year EBITDA guidance. All financial guidance is dependent on the company’s merger with EQM closing in June. Management also noted that it no longer has financial guidance past 2020, implying that the forecasts provided in February out to 2023 are now no longer applicable.
The decline in oil prices does not impact all energy companies in the same way. The relative defensiveness and stability of midstream cash flows is clearly evident in a comparison of forward EBITDA estimate revisions for midstream relative to broader energy and E&Ps. Despite the greater stability of midstream cash flows, the space has largely sold off in line with broader energy and moderately outperformed E&Ps. While the impact of negative energy sentiment and forced selling (for example, closed-end fund deleveraging for MLPs) are difficult to quantify, there seems to be a distinct disconnect in midstream equity performance relative to broader energy and E&Ps when considering the relatively mild revisions to midstream forward EBITDA expectations.