The Dakota Access LLC crude oil pipeline shutdown could strain Bakken shale producers' cash flows, alongside projected revenue losses for the midstream companies that operate the project, analysts said.
A federal court ordered the 570,000-barrel-per-day pipeline to close by Aug. 5 until a full environmental review is completed, leaving the pipeline's owners in the lurch and requiring Williston Basin drillers to find alternative conduits for their volumes.
"Shutting down the [Dakota Access] pipeline in our opinion will increase the cost of getting Bakken production to markets as DAPL was one of if not the lowest cost avenues to market," analysts at UBS told clients July 6. "This is a setback for a basin that has struggled production wise. ... The lower netback from higher transportation costs to producers ... could stall/slow the return of production ramp for the basin."
Moody's said in a July 8 note to clients that for independent producers such as Continental Resources Inc. and Hess Corp., whose Bakken volumes accounted for 57% and 45% of their businesses, respectively, "the shutdown of the pipeline would not impede the overall business fundamentals ... but will still stifle any recovery in cash flow generation from the region in 2020-21."
Analysts at Barclays noted that most of the drillers it covers have portfolio approaches for selling Bakken production that includes access to rail transportation, which is more expensive, and "other pipelines such as Double H or Butte that run south." But not all of those companies will have enough of a cushion as Dakota Access empties out.
"As expected, the negative cash flow impact is the most for [Oasis Petroleum Inc.] at -27% and is the least for [ConocoPhillips] (-1%) and [EOG Resources Inc.] (-1%)," they wrote in a July 8 note to clients. "Most of [Oasis'] volumes could go to rail economics, presenting another overhang on a challenged liquidity/leverage situation."
The company could be in line to file for Chapter 11 bankruptcy protection after disclosing in its most recent Form 10-Q filing that it may be reaching the point of no return.
For the pipeline's owners, according to Moody's, Phillips 66 Partners LP's cash flow has the most exposure to Dakota Access, which accounts for 19% of the master limited partnership's consolidated EBITDA as of March 31. For majority owner and operator Energy Transfer LP, the pipeline's revenues only account for 3.3% of EBITDA. MPLX LP and Enbridge Inc. also have Dakota Access ownership interests.
But even for Energy Transfer, the consequences of losing that cash flow could require the pipeline giant to sell assets. Financial advisers at Raymond James & Associates Inc. told clients July 6 that Dakota Access "stands to lose $643 million in revenues in 2H20 and ~$1.4 billion in revenues in 2021."
Moody's changed Energy Transfer subsidiaries Energy Transfer Operating LP and Midwest Connector Capital Co. LLC's credit outlooks to negative July 7. For Energy Transfer Operating, "the potential loss of up to a year's EBITDA derived from ETO's 38% ownership of Dakota Access will exacerbate earnings weakness already anticipated in 2020 resulting from COVID-related supply and demand shocks to domestic energy markets." On the other hand, debt issuance vehicle Midwest Connector Capital is still guaranteed payment even if the project's owners cannot service that debt per a contingent equity contribution agreement.
"To the extent that the pipeline would be ordered to shut down as a consequence of ongoing litigation, the sponsors would essentially make a decision about whether those issues that caused the shutdown could be successfully remediated, and if that is the case they agreed to support operating costs including debt service of the Midwest Connector Capital notes," Moody's Vice President Andrew Brooks explained in an interview. "If the sponsors decided they could not successfully remediate, then they would be obligated to repurchase the notes at a 101% purchase price."