Why Biden’s Heat Won’t Melt Halfway


When investing, the economy always trumps politics. It is worth remembering at a time when midstream energy and pipeline companies are not popular with investors, and many advisers and media figures are predicting the end of the industry.

Midstream has been declining since mid-2019, when North American oil and gas producers began to pull back in the face of a glut in global supply. The decline of businesses accelerated this spring, as the fallout from the pandemic collapsed on demand for refined products.

Since the beginning of March, 75 energy companies from our Energy and Income Advisor the hedging universe has reduced or eliminated dividends. And with 33 still on our “Dividend at Risk List,” further damage is underway as weaker traders count with a deadly combination of slippery income and mountains of debt coming due.

Midstream’s plight appeared to worsen further with the November election results. Investor concerns now focus on the possibility that Democrats will find themselves in command of the US Senate after the run-off election in Georgia. And many are firmly convinced by the campaign rhetoric that a radical change is happening to energy regulations, even if Republicans keep the Senate.

Over the next four years, the new administration will be able to reshape the staff of key agencies like the Federal Energy Regulatory Commission. And it will rewrite regulations in multiple areas affecting energy companies.

But if we’ve learned anything over the past four years, it’s that there are limits to the power of any president to shape the fate of the energy industry. This is clear from the utter failure of the Trump administration to slow the phase-out of coal-fired electricity in the United States.

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Mainly, despite the retreat of clean air and water rules, the share of coal in the US electricity mix has fallen from over 30% to less than 20% since 2015. And over the next decade , the vast majority of plants will close permanently.

The reason is simply economic: replacing aging coal plants with a combination of new natural gas and renewable energy cuts costs. Utilities can keep customer rates down even if they add new investment to the rate base, thereby increasing profits.

As president, Biden can join the Paris Climate Agreement, raise fuel economy standards, more tightly regulate methane emissions, establish new controls on production and the payment of royalties from gasoline. drilling on federal lands, buying more electric vehicles for government use, and affecting trade policy.

But without an act of Congress, he can’t even expand wind and solar tax credits. It cannot set new federal clean energy standards or directly fund research. And he certainly cannot ban hydraulic fracturing for oil and gas, as many now seem to fear.

As a candidate, the former vice president focused only on measures that would encourage the deployment of renewables and electric vehicles. But even if you buy the Trump campaign rhetoric that there is a hidden agenda to kill oil and gas, the road to approval, even in a Democratic-controlled Senate, would require all 5 Democrats to vote. originating in the major oil and gas producing states of Colorado, New Mexico and Pennsylvania.

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And that’s why Bloomberg Intelligence assesses the only likely changes for the mid-sector to be tougher rules on methane emissions and a more difficult licensing process for new oil and gas drilling and midstream infrastructure. And neither will affect the economy of the sector much, if at all.

On the one hand, the intermediate energy companies that matter are already investing heavily to reduce their methane emissions. This was more to increase efficiency and reduce costs than to comply with new regulations.

This summer, for example, Williams Enterprises (NYSE: WMB) announced that it would reduce the system’s greenhouse gas emissions by 56% by 2030. During its third-quarter earnings call, Kinder Morgan Inc (NYSE: KMI) Management said they were doing pretty much the same. So done Enbridge Inc (TSX: ENB, NYSE: ENB), Enterprise Product Partners (NYSE: EPD), Energy transfer (NYSE: ET) and TC Energy (TSX: TRP, NYSE: TRP).

While mid-market companies are already cutting CAPEX to the bone, a more difficult authorization process for new infrastructure will not have much impact either. In fact, jumping through more hurdles at the FERC, US Army Corps of Engineers, and / or the Environmental Protection Agency may well make successful projects better suited to withstand well-funded legal challenges. These have ground approvals on hold for the past two years, despite a permissive federal regulatory structure.

More difficult permits and cheaper alternatives to natural gas-fired electricity could spell the end of the giant intermediate projects that have proliferated over the previous decade. With the abandonment of the Atlantic Coast Pipeline Project, the spotlight is now on the Mountain Valley Pipeline.

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This 300-mile system was originally supposed to start shipping natural gas from Appalachia to utilities in Virginia by the end of 2018, at a cost of about $ 3.5 billion. This month, lead developer Equitrans Midstream (ETRN) revised to an “end of 2021” opening at a projected cost of $ 5.8 billion to $ 6 billion. And with MVP, work is currently stuck on a 4e Ruling from the Circuit Court of Appeals, both estimates could prove to be optimistic, even if the Biden administration does not withdraw the water crossing permits currently at issue.

A potential MVP delisting would be a blow to Equitrans, which has already been hit hard by production cuts by a major customer and former parent. EQT Corp (EQT). It could also trigger a write-off of up to half the utility RGC Resources ” (RGCO) equity.

The damage would be much more easily absorbed by the other three partners Altagas (ALA, ATGFF), Consolidated Edison (NYSE: ED) and NextEra Energy (BORN). But the trio have arguably already been dissuaded from investing in similar projects.

The upside: Fewer pipelines and related infrastructure built now means capacity shortages later, as transportation demand rebounds. And if the third quarter results of major mid-market companies are any indication, we are already past the inflection point for that.

Not all intermediate channels will survive current conditions. But the majors are on track for a major rebound in cash flow and asset values ​​next year. And regardless of the energy policies that emerge from both ends of Pennsylvania Avenue in Washington DC



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