Conflict keeps midstream compelling, integrateds see a pipeline of cash

Hello and welcome to Global Research Unlocked, where we discuss what's rising from growth industries to rising risks and opportunities in global markets. I'm TJ Thornton, Head of Product Marketing at BofA Global Research, and we're recording this episode on Tuesday, April 21st, 2026. It should in theory be enough for U.S. producers to want to grow, but so far they've all been preaching capital discipline and that they're not going to, you know, just put up the shareholders and we'll get that windfall rather than putting it back into the ground.

So you'll certainly see some of the privates grow, but I don't think you're going to see a massive growth trajectory in the U.S. from this. Headlines impacting oil prices and energy stocks should keep coming and will remain difficult to predict. But the base case for our economics and commodity teams is that there will be an agreement between the U.S. and Iran in the next few weeks, and that the Strait of Hormuz will reopen even if energy deficits persist for the remainder of the year.

If that's roughly correct, where does that leave U.S. integrated oil and midstream stocks? Energy is still the best performing sector year-to-date by a wide margin, and can that continue perhaps because of changes in energy markets following the war in Iran? Joining us today is Jeanne-Anne Salisbury, who covers integrated refining and midstream energy stocks at BofA Global Research.

Jeanne-Anne, thanks for joining us. Jeanne-Anne, if we assume that the Strait reopens and Middle East oil and gas supply comes back online eventually, that we go back to having an oil surplus again by around year end, how do you think about your integrated oil stocks at these levels? I mentioned before they have rallied, they are the best performing sector this year, but are there opportunities still ahead because of attractive valuations and growth, or are the stocks pricing in a lot of optimism?

Is there still up so much year-to-date? That's a great question, TJ. So I think a lot of the time, the prices that you see quoted for oil in newspapers and stuff, it's usually talking about next month's price.

That's kind of what you've seen at 90, 100, 110 over the last six weeks or so. I think for the valuation of the integrated, what we're really looking at though is what the long-term oil price is. I think that a good proxy for this is that if you look at the forward strip for oil price two years out, so right now, it would be like the forward oil price that people are willing to pay for kind of early 2028, and right now, that's kind of in the low $70 range.

At the height of the conflict a few weeks ago, it was at $78, $79, and we thought that that was kind of what the integrated oil companies were pricing, high $70s or even $80 as a long-term price. Coming into the air, something around the high $50s was what was priced in because of the oil oversupply. So what's interesting is that if you look back at this two-year forward price, so at any given time, what the oil price two years away was, it's really never held above $80 for any material amount of time for the last 15 years.

So when that was what was being priced into the integrated a few weeks ago, it was really feeling like that was the max that the equities could really get to. It was hard to pound the table even heading up to that point. I think that today, with the integrateds and the oil price drip pricing right around $70, $71 long-term, it seems fair.

I think if they kind of continue to come down over the next few weeks because of more progress or perceived progress for peace, I think it could become an interesting entry point for this space. Okay. Okay.

Jean-Anne, it's been argued that things won't just go back to normal even if this trade does fully reopen. There's talk of energy security and maybe some buyers of energy looking elsewhere to make sure that they continue to get that flow. Do you think that buyers of oil and natural gas will behave differently as that comes into question, and if so, in what ways?

So I think so, and that's actually a part of why I see support at $70 long-term oil price, even though, like I mentioned, we came into this year expecting that to be at $60. I see potentially three things that could change structurally after this conflict, some good and some bad for the space. First of all, I think that there will be much more strategic petroleum reserve and oil storage building.

Back in 2022, the U.S. drew down a lot of oil storage during the Russia conflict, and we never refilled it. Many other importing countries have no real material strategic storage at all, and I think that they're regretting that right now, and I think that China will almost certainly refill their storage to the brim. In total, I think that this could create a tailwind for demand over the next few years, close to 1 million barrels per day or an extra percent of demand.

With that, even if OPEC continues to add, as was kind of originally planned, and if the straits fully reopened, I don't think we're massively oversupplied, and I think that $70 can be sustained. So I think that there is this structural tailwind to oil price because of the restocking that we'll see over the next few years. The second big change that I see structurally is that I think that U.S.

LNG will look more attractive versus Qatari LNG. I think you could see countries sign contracts with U.S. LNG companies over the next year almost as redundancy for cutter volumes that may never be considered low risk again.

So that could be a boon to both the LNG liquefaction companies and the service companies that build those LNG projects. Thirdly, I think that this actually could be a boon to batteries and renewables. It could put countries on a more vigorous path to try to reduce oil and gas use more long term, so kind of over the next 10 to 15 years.

But I think that when you're trying to do some of this stuff more for energy security than for the ESG reasons that people pursued the last time around, I think it might stick more. So it could ultimately bring in the terminal value of oil and gas in the far future. Maybe in the 2040s you could see that start to come in.

But for the next five years, seven years, I think it's all very positive. Okay. Thanks, Jeannine.

And on that point about LNG, there was some pretty lasting damage to some of the facilities in the Middle East such that even if things do get resolved there pretty quickly, there could be a few years ahead of us before things get back to the capacity where they were prior to the conflict. But at the same time, there was oversupply in LNG, I think, coming into the year. How do you think about that LNG supply-demand balance as you look ahead over the next couple of years?

Yes. We in the market used to see LNG as oversupplied starting in 2027, with that oversupply lasting through 2031 and depressing prices. However, there's kind of two things that have happened in Qatar that seem long-lasting.

The first, as you referenced, was that Iran hit two of the seven LNG production train with missiles. They're expected to take three to five years to repair, and that will be kind of fully offline during that time. That takes a few percent out of global capacity for that three-to-five-year period.

Secondly, there was an extremely large new project in Qatar that was supposed to come on at the end of this year. I think everyone thinks it's now likely delayed at least one year. Between those two things, we see global LNG as being more or less balanced through 2030, which takes away a bear case for many of the U.S.

LNG companies that are making money from the arb between U.S. price for gas and global price for gas. When we mark to market for the forward strip, it adds over 50 percent to EBITDA for some of the companies next year as a result. I think more importantly, you will see more U.S.

LNG contract signings, almost for redundancy to backup Qatar. Got it. And it's those signings that you think will continue to potentially drive these stocks higher?

Yes, exactly. Yep. OK.

Pipelines. I think it's a somewhat related question. You've been constructive and were constructive even prior to the war with the view that we'll see more capacity growth, partly as states like New York that had previously been resistant to new pipelines become more accepting of them.

And of course, there's also gas demand from new data center construction. But does the war in Iran do anything for that story? And if there is more draw on U.S.

LNG, does that help the pipeline story? I don't think that the war in Iran does a lot to reinforce new gas pipelines, but I think it probably just plays into what was already very important of needing to make sure that the U.S. was a leader in energy security and the data center and AI race. So I don't think it takes away, but I think it's mildly positive, I would say.

I'm still very bullish on new gas pipelines being built in the U.S. I think that there's been very long overdue change in attitude. I think if you look at the last 15 years, every new gas pipeline that attempted to be built, what usually happened was that there would be a pass through state or a couple pass through states of every gas or oil pipeline where it was going from North Dakota or Ohio or wherever to the ultimate end use, which was often down in the Gulf Coast or to the East Coast.

And usually, you would have a state where the pipeline was passing through and the state would just throw up roadblock after roadblock until the pipeline often canceled. But that's honestly – a lot of the time, you would just see prices double to build the pipeline before that. What you're seeing now because of the data center and electricity boost is that the states are actually the demand themselves.

So I think you can see this really clearly in this huge new pipeline that's being built through New Mexico and Arizona over the next two or three years. We haven't really built a pipeline in those states in decades. And what's different about this is that New Mexico and Arizona are the customers of this gas.

Their utilities need the gas. The data centers are supposed to start up at a certain time. The utilities have been really underinvested in all this time.

And so what's different is that the company that is building this pipeline says that they have a great relationship with the state senators of both New Mexico and Arizona and that they are fully committed to getting the pipeline online, which hadn't been the case before. I think you're even seeing signs of this in the Northeast where it's been impossible to build more gas capacity into the New England states or the New York area for the last probably eight years, ten years. And you've had a couple of proposals finally go forward to add more gas to the New York area.

And there's a lot of signs that one of the next proposals that wants to bring gas to New England will be successful as well. At a conference where we had one of the Northeast utilities, they were saying that they've been mandated to build more gas generation. And the next step for that obviously will be to get a pipeline to deliver the gas.

And that will mean taking RFPs on the pipeline. So I think after a very long time, you will actually see more gas pipelines be built in some of these states that haven't seen it in decades. Got it.

What kind of growth in capacity are we talking about here? I mean, if we were to think about kind of the growth in gas pipelines over the last decade, how much of an uptick should we expect going forward? I think that gas demand, so just total gas growth in the U.S., is growing at kind of a couple percent a year, but that's a lot actually based on the past.

And then on top of that, you have the LNG that's growing more. So altogether, total gas demand, including LNG in the U.S., is growing kind of three or four percent. But we actually think that CapEx for gas pipelines and EBITDA for gas pipeline companies is growing closer to six or seven percent because of the dynamics that I talked about before, where it's just been under-invested in, and it's really expensive now to build gas pipelines for that last mile.

So I think if you would have asked me three years ago, four years ago, what my long-term growth rate for some of these gas pipeline companies was, I would have said low single digits. Now I think six or seven, maybe even approaching high single digits, which is exciting for midstream to have that shift. Got it.

And with that sort of high single digit CapEx, I guess you're talking about probably double digit EBITDA growth in some cases for some of these companies? In some cases, yeah. If they're directly related, I think, to the power for some of the smaller ones that are pure place, you can get to double digits for sure.

Got it. OK. So our Venezuela economist wrote a note about how oil production has returned to pre-December levels and saying that it was likely to rise another 40 percent or so over the next two years.

In theory, sanctions relief in Iran could lead to an increase in production there. So if things go right in Venezuela and Iran, could production increases lead to supply glut for oil further out? That's one question.

And then the other question is, you know, are U.S. integrateds well positioned to maybe take advantage of some of this growth and participate in some of it? Yeah. So I think on the first question, I think most people are kind of rightly cautious of the Venezuela runway.

We've been kind of a little under a million barrels a day for the last couple of years. I think, as you pointed out, there's probably a relatively easy two, three hundred thousand that you could grow off of that by doing relatively easy things. I think once you're talking about getting to another million, another two million in Venezuela to get back to the highs of the 90s, you're talking about tens, if not hundreds of billions of dollars of capex.

I think even though you kind of hear that there's a lot of interest from a lot of these I don't know. I don't think that a lot of these companies are really going to go in unless they're already there, which is the case with a few of them. But I think for new companies to go in when they've already been expropriated, in some cases in the past, it's pretty unlikely.

So I think you'll see a few hundred thousand barrels more out of Venezuela. But I don't think it's going to be a ton more than that. Similarly with Iran, I think if everything went great, you could get some production increase.

But Iran's production has not actually been that depressed. It's just mostly been going to China for the last few years. So I think if everything went perfectly, you could get an extra half a million to a million barrels a day, which would be a supply glut.

But I kind of don't know if things are going to go perfectly. As far as U.S. companies go, it's going to be an interesting earning season. I think that's actually like the biggest question in the space is it went from $58 crude at the beginning of this year to, like I said, 90 for the front month and in the high 70s for the medium term.

Got it. I suppose that's one of the things that sort of makes you positive on some of the names in the group, right? It's just the cash flow.

And with these higher long term oil prices, I assume, but I don't know. I mean, is the cash flow generation on a percentage basis better than it was, say, a year ago or at the start of the year? Yeah, absolutely.

I think that that extra $10, it kind of goes straight into the cash flow outlook. And so I think that that's worth a double digit valuation for a lot of these companies. Got it.

Last question, and you did touch on it before on renewables, it would seem that it would accelerate the desire for China, Europe and other areas that have been dependent on the import of fossil fuels to become more self-sufficient through renewables. Have we seen evidence of that? How big do you think it could be?

And then, of course, the question is, does that impact the overall picture long term for oil demand? Yeah, so far you haven't seen a ton of truth shifting, and I think they're right now. Like I think if you kind of split the world into gas and oil, it's interesting because what you've really seen fill the gap this year as gas prices have gone up globally is that people have been ramping up coal.

And so that's really, I'd say, the near term competition for gas and why you may kind of not see as much spike in gas prices you might have expected. But I don't know that everybody is really going to want to be dependent on more coal for the long term. So I feel OK about LNG, but I do think that people will probably sign redundant contracts with the U.S. versus depending fully on butter in the future.

I think for oil, you haven't right now in a very short term, you don't have the equivalent of coal like you can't really just stop using oil and use X for your jet fuel or for diesel. I think that you probably could see an acceleration towards more electric vehicles than was there before over the next five, 10 years. And so if you thought that we were going to kind of plateau on oil demand around the early 2030s and then hold that for five, 10 years, that could potentially come in a bit.

But I think it's offset, like I said, by the restocking benefit that you get over the next three or four or five years. You've just been living with very little spare inventory and I don't think you can do that anymore. OK, thanks, Jean-Anne, for an excellent discussion.

Thanks. For one, as things settle out here and with integrated oil stocks off highs, a few of the stocks look interesting to Jean-Anne, especially because the $10 plus increase in long term oil prices since the start of the war should mean stronger cash flow generation. Much of that cash flow will go back to shareholders.

The case for growth in pipelines remains. It's not impacted much by the war, but we should see capex growth in the mid to high single digits for these, a big improvement from what we had been seeing. And that should translate to EBITDA growth in the low double digits, at least for the names are most impacted.

Part of the boost to capex for pipelines comes from data centers and general electrification. And in the medium term, energy security considerations could lead to more demand for renewables, but we'll also see more demand for strategic reserves. So while long term demand for oil may deteriorate, we may not have to contend with that for a while.

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