East Daley: Market Confused and Ignoring Facts in Relation to Recent FERC Tax Policies on Natural Gas Pipelines

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, Colo.--()--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.”

Contact East Daley for a copy of its official response to these changes, titled: FERC Rules On Tax Changes.

Dirty Little Secrets is East Daley’s most comprehensive report on the U.S. oil and gas midstream sector. This report is used by investors, institutional banks, fund managers, private equity, midstream companies and E&Ps to understand how changing energy market dynamics will impact the midstream sector in 2018 and beyond. This report is made possible by East Daley’s dedicated team of midstream analysts, leveraging the largest database of U.S. energy infrastructure that delivers unprecedented clarity into the vast network of midstream assets.

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.

East Daley Capital 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.

Contacts

East Daley Capital
John Lange, 303-499-5940
Vice-President, Managing Director of Sales and Marketing
jlange@eastdaley.com

Release Summary

Market Confused and Ignoring Facts in Relation to Recent FERC Tax Policies on Natural Gas Pipelines

Contacts

East Daley Capital
John Lange, 303-499-5940
Vice-President, Managing Director of Sales and Marketing
jlange@eastdaley.com