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Home » Economics » Midstream companies cut investments by 50% after oil accident – OilPrice.com

Midstream companies cut investments by 50% after oil accident – OilPrice.com

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With the collapse in demand for oil, oil producers and refiners are under intense financial pressure. Not far behind, the integrated super-big ones like ExxonMobil and Chevron. These companies have upstream assets (oil and gas producers) as well as refining assets, so they are affected at both ends. However, they also have significant intermediate assets. Midstream refers to the transportation and storage of petroleum, natural gas and finished products such as gasoline. Intermediate assets generally play the role of toll collectors and are more isolated from the volatility of commodity prices.

Many intermediary companies – corporations and limited partnerships (MLP) – actually increased their distributions throughout the oil crash of 2014-2016.

But being isolated from volatility does not mean that they are completely immune to the effects of the price collapse. Although most middlemen have long-term agreements with their customers, they are likely to face tougher terms as their agreements are renewed. Thus, a long-term price collapse will eventually have an impact on the fundamentals of the intermediate sector.

We are already witnessing impacts with weaker intermediate actors. Some have already reduced distributions, but others have said they are fine – at least for now.

How do we know which intermediary companies are most at risk of encountering financial difficulties and having to announce distribution cuts? One way is to examine the credit scores. The lower the credit rating, the more likely the company is to announce a reduction in distribution to consolidate its financial parameters.

But the magnitude of the reductions in capital spending can also be revealing. A recent note from Alerian, an independent supplier of energy infrastructure and commercial intelligence MLP, sheds light on this subject.

Related: Collapse in Number of US Platforms Continues Despite Soaring Oil Prices

the Note presented the following table, which summarizes the reductions in intermediate capital expenditures (investments) for 2020 for several intermediary companies. On average, investments were reduced by almost 30% compared to the initial forecasts and by more than 45% compared to 2019.

One might assume that the companies that cut their forecasts deeply are the ones most at risk of reducing their distribution. In fact, the deepest cuts listed are those of DCP Midstream, which has already announced a 50% distribution cut.

There are other reasons why an intermediary could significantly reduce capital spending. They might just decide to be extremely conservative given the uncertainty in the oil and gas sector.

But as an investor, I would be particularly wary of those companies that are announcing much deeper cuts than their peers. It is, at a minimum, a red flag on the company’s financial statements that should be investigated further.

By Robert Rapier

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