• 4 minutes Nord Stream 2 Halt Possible Over Navalny Poisoning
  • 8 minutes America Could Go Fully Electric Right Now
  • 11 minutes JP Morgan says investors should prepare for rising odds of Trump win
  • 37 mins US after 4 more years of Trump?
  • 2 days Daniel Yergin Book is a Reality Check on Energy
  • 1 hour Something wicked this way comes
  • 3 days Permian in for Prosperous and Bright Future
  • 20 mins Why NG falling n crude up?
  • 22 mins Oil giants partner with environmental group to track Permian Basin's methane emissions
  • 2 days Famine, Economic Collapse of China on the Horizon?
  • 3 days Gepthermal fracking: how to confuse a greenie
  • 3 days YPF to redeploy rigs in Vaca Muerta on export potential
  • 3 days Top HHS official takes leave of absence after Facebook rant about CDC conspiracies
  • 18 hours The Perfect Solution To Remove Conflict Problems In The South China East Asia Sea
  • 2 days Open letter from Politico about US-russian relations
  • 4 days Surviving without coal is a challenge!!
Has Oil Demand Peaked?

Has Oil Demand Peaked?

The big questions in the…

China Not Looking To Ban Gasoline Powered Cars Any Time Soon

China Not Looking To Ban Gasoline Powered Cars Any Time Soon

The world’s largest automotive market,…

Oil Bulls Return As OPEC+ Reassures Markets

Oil Bulls Return As OPEC+ Reassures Markets

After oil prices crashed at…

Robert Rapier

Robert Rapier

More Info

Premium Content

Midstream Companies Slash Capex By 50% After Oil Crash

With the collapse in oil demand, oil producers and refiners have come under intense financial pressure. Not far behind are the integrated supermajors like ExxonMobil and Chevron. These companies have upstream (oil- and gas-producing) assets as well as refining assets, so they are getting hit on both ends. However, they also have substantial midstream assets. Midstream refers to the transport and storage of oil, natural gas, and finished products like gasoline. Midstream assets generally function as toll collectors, and are more insulated from the volatility of commodity prices.

Many midstream companies — corporations and master limited partnerships (MLPs) — actually grew their distributions throughout the 2014-2016 oil price crash.

But being insulated from the volatility doesn’t mean they are completely immune from the impacts of the price collapse. Although most midstream companies have long-term agreements with their customers, they are likely to face tougher terms as their agreements come up for renewal. Thus, a long-term price collapse will eventually impact the fundamentals of the midstream sector.

We are already witnessing impacts with the weaker midstream players. Some have already cut distributions, but others have said that they are fine – at least for now.

How do we know which midstream companies are at greatest risk of running into financial difficulty, and potentially having to announce distribution cuts? One way is to look at credit ratings. The lower the credit rating, the more likely a company will announce a distribution cut to shore up its financial metrics.

But the extent of cuts to capital expenditures may also be revealing. A recent note from Alerian, an independent provider of energy infrastructure and MLP market intelligence, sheds some light on this topic.

Related: U.S. Rig Count Collapse Continues Despite Soaring Oil Prices

The note featured the following table, which summarizes midstream capital expenditure (capex) reductions for 2020 for several midstream companies. On average, capex has been reduced nearly 30 percent against initial guidance, and more than 45 percent versus 2019.

One might surmise that the companies making deep cuts to guidance are companies that are at the greatest risk of making distribution cuts. In fact, the deepest cuts listed are by DCP Midstream, which has already announced a 50 percent distribution cut.

There are other reasons a midstream might make deep cuts to capital spending. They may just decide to be extra conservative given the uncertainty hanging over the oil and gas sector.

But as an investor, I would be particularly wary of those companies announcing much deeper cuts than their peers. That is, at a minimum, a red flag about the company’s financials that should be investigated in greater detail.

By Robert Rapier

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment
  • Maxander on May 24 2020 said:
    Simple to understand when midstream companies started to feel the impact of crude oil collapse.
    Consumers will experience closed gas fuel stations, reduced timings of fuel stations. In short vehicle owners will find it difficult to fill the gas/diesel/petrol whenever they want to add fuel to their tank.
    These all things may happen even after lockdown has been completely lifted since long time.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News