The Daley Note: June 14, 2023
Kinder Morgan (KMI) and Energy Transfer (ET) both outperformed Street expectations in 1Q23, and their joint ownership of the Midcontinent Express Pipeline (MEP) was a big reason why. The pipeline posted a strong quarter due to dislocation in regional natural gas prices linked to Haynesville supply growth.
In 1Q23, MEP posted quarterly EBITDA of $66MM on revenue of $76MM, according to financial data filed with the Federal Energy Regulatory Commission (FERC). This came on the heels of average quarterly EBITDA and revenue of $12MM and $22MM from 1Q22-3Q22.
Marketers such as Citadel, Total, and Freepoint drove the pop in performance. These shippers reserved firm transportation capacity on MEP in November 2022 to profit off wide regional price differences. MEP can deliver Anadarko and Haynesville supply eastbound to the Southeast, and spreads blew out between the producing region (represented by NGPL - TXOK in the chart) and the downstream Transco St. 85 point (see figure).
Several factors contributed to wider price spreads. Haynesville production has been growing rapidly and filling pipelines in Louisiana and East Texas, causing gas to back up at times at Carthage. The Freeport LNG facility also was still idle from a fire dating to June 2022, cutting ~2.0 Bcf/d of local demand on the Texas Gulf Coast.
Of the 1.1 Bcf/d of capacity contracted on Midcon Express in November 2022, shippers signed 820 MMcf/d (75%) under shorter terms that expire in 1Q23 or 4Q23. Spreads compressed significantly in 1Q23 as Freeport LNG restarted and Energy Transfer’s (ET) Gulf Run pipeline started service, evacuating backed-up supply. Spreads from NGPL-TX to Transco St. 85 have remained relatively compressed this year, suggesting the spike in revenue and EBITDA is likely to be a short-lived boost for MEP. The recent market dislocation proves the value of owning an integrated gas network, which paid off for KMI and ET. – Rob Wilson Tickers: ET, KMI.
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