Moody’s: Global midstream sees little earnings growth in 2023

May 1, 2023

The global midstream sector’s EBITDA (earnings before interest, taxes, depreciation, and amortization) will likely expand by a modest 0-2% in 2023, with growth unlikely to pick up significantly in 2024, according to analysis from Moody’s Investors Service.

“Strong energy commodity prices in 2022 benefited midstream energy companies with growth in underlying volumes. Marginal growth in 2023 oil and gas volumes should slightly boost midstream companies’ performance. Still, inflation from higher wages and operating costs will cut into cash flow, holding the sector’s EBITDA growth to less than 2% in 2023,” Moody’s said.

Midstream energy capital spending in 2023, even with an increase to account for inflation, will remain below peak levels, limiting the sector’s prospects for future EBITDA growth.

“For most of the past decade, the sector responded robustly to the infrastructure needs of the North American oil and gas shale expansion, powering the sector’s substantial EBITDA growth. Today, however, midstream companies are restraining their growth capital spending, now that E&P demand for new infrastructure has ebbed,” Moody’s said.

Midstream companies in 2023 will increase their own capital spending by some 10-12% from low levels before trimming again in 2024, based on current visibility for projects next year, according to Moody’s. This follows a period of significantly lower investment, with a nearly 30% decline in capital spending 2021 on top of a roughly 35% drop in 2020. After midstream capital spending peaked in 2018, companies wound down their spending as they completed projects. Spending for new projects, meanwhile, has plummeted amid energy industry volatility and upstream capital discipline. The midstream sector’s growth derives strongly from upstream volume growth and will likely have limited upstream support in the near future.

Meantime, as midstream growth opportunities have receded, midstream operators have less need to raise ever-increasing amounts of debt and equity financing. Many are shifting to focus more intently on cash retention and rationing their capital investment to help generate positive free cash flow, while largely self-funding project investment.