Midstream enterprises have considerably raked through their 2020 investment plans, and most have removed all but essential project spending. Downward capital expenditure adjustments had become unavoidable in view of the maelstrom of coronavirus-related simultaneous issues facing the industry including the coronavirus, a staggering economy, demand destruction for crude oil and refined products, and global energy oversupplies.
To assess the midstream industry's adjustments to a highly challenging environment, capital investment updates were collected from special disclosures issued by companies prior to earnings season and then from earnings reports themselves.
Capital investment revisions were assessed for a 35-company sample from across the midstream value chain. The group of 35 was chosen due to the availability of initial 2020 investment forecasts along with transparent updates to capex expectations post-coronavirus.
Most midstream businesses, as well as the global upstream energy industry, have entered uncharted territory as they address an unprecedented operational and financial environment that could take years to normalize.
Oil oversupplies and vanishing demand for multiple energy commodities have invoked an especially challenging environment for liquids-focused midstream businesses.
The midstream industries closest to the upstream sphere, including the gatherers and processors, have noted the greatest potential for disturbances in their cash flows in the ensuing quarters. The liquids-logistics and transportation and storage enterprises are susceptible to varying degrees depending on their commodity mix.
Those businesses with substantial crude oil storage are expected to benefit from higher capacity utilization, while those that process and fractionate natural gas liquids, transport and store NGLs, and handle oil sands will likely be fundamentally challenged.
The diversified enterprises with the largest balance sheets and geographic footprints are anticipated to have the most resistance to cash flow disruptions this year as several own large interstate natural gas pipeline networks, and natural gas demand from utilities is expected to generally hold up.
Amendments to 2020 midstream capex forecasts have been profound and cut across a broad swath of the midstream sector. The cross-industry capex cuts have ranged from 10% to 75% in the context of the company's prior capital investment guidance issued earlier this year.
Those diversified enterprises and pure plays that operate in the gathering and processing trade have generally made the most substantial downward adjustments.
Evaluation of the data indicates a drop of over 36% in overall organic growth projects this year for the composite midstream industry. A segmented analysis of the 35 companies according to their primary midstream focus was also performed. The results are summarized in the text and tables.
Large diversified enterprises exhibit lowest revisions to 2020 capex compared with other segments
The diversified enterprises indicate the lowest expected segment decrease in 2020 capex — with a 23% truncation in expected growth project spending compared to 2019.
Capital expenditure plans, especially by the largest midstream enterprises, generally maintain financial support for long-lead-time ventures, especially those considered crucial. Projects judged nonessential have been pushed into the future or canceled.
Gathering and processing capital investment falls nearly 60% for the segment
The gathering and processing, or G&P, segment has been remarkable for the degree of announced capex decreases.
The aggregate expectation for the 15 companies in the G&P segment is for 59% lower capex in 2020. If this highly dampened environment holds through the year, 2020 capex could represent the largest percentage drop in G&P investment in more than a decade.
In the aftermath of the last oil collapse, G&P investment fell to $4.5 billion from $7.6 billion in 2015. Aggregate investment in the G&P segment is projected to be $5.5 billion in 2020, a precipitous fall from the $13.5 billion invested in 2019.
Transportation and storage industry is not immune
The liquids-centric businesses in the transportation and storage segment as well as logistics and marketing will be notable for large decreases in expected capex this year as the demand for crude oil, refined products and NGLs has fallen precipitously and is not expected to recover substantially near term.
As observed in a recently released revolver study, many of the transportation enterprises have concentrated exposure to crude oil, oil sands, refined petroleum, NGLs and other liquids, all of which are challenged by oversupplies and decreased demand.
The 11 companies in the transportation and storage segment together reveal the possibility of a 40% decrease in 2020 capex. Those with the greatest exposure to liquids including NGLs, oil sands and refined petroleum appear to have lowered capex the most. These include MPLX LP, Pembina Pipeline Corp. and NuStar Energy LP. Businesses that have significant crude oil storage capacity or significant natural gas operations appear to have less severe capex adjustments.
Regulatory Research Associates is a group within S&P Global Market Intelligence.
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