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Midstream Capex 40% Lower In Several Segments As Industry Hunkers Down

A number of midstream enterprises have considerably updated their investment plans for 2020 in view of the heightened uncertainties around the coronavirus and other compounding issues that plague the industry. Oil oversupplies and waning demand for multiple energy commodities has invoked an especially challenging environment for liquids-focused midstream businesses.

The midstream industries closest to the upstream sphere, including the gatherers and processors, are likely to experience the greatest disturbances in their cash flows. However, liquids transportation and logistics enterprises are also not immune from the fallout.

The large diversified enterprises are anticipated to have the most resistance to cash flow disruptions. However, these businesses will still seek to save cash, decreasing operating and maintenance expenses, as well as capital expenditures wherever safely possible.

Amendments to 2020 midstream capex forecasts so far have generally reflected a 15%-to-50% lower range in investment level for many companies compared with their prior capital investment guidance Those that operate in the gathering and processing trade have so far made the most substantial downward adjustments, and some may soon make additional revisions.

To assess those companies that have yet to announce capital investment revisions for 2020, an analysis of a 39-company sample from across the midstream value-chain was undertaken via aggregated consensus estimates of capex.

These data indicate a drop of 23% in overall organic growth projects this year for the midstream industry. The 39-companies were also segmented according to their primary midstream focus, to provide sub-industry drill-down. The results are summarized in the text, tables, and charts below.

Large diversified enterprises show the lowest expected revisions in 2020 capex

While the diversified enterprises presently show the lowest expected segment decrease in 2020 capex — with a 11% downdraft compared to 2019 — the majority of the six large entities have yet to release updated capex plans for this year. Should the diversified group follow the capex trends of 2016 during the height of the last oil bust, 2020 aggregate capex may fall 25% or more this year, compared with 2019.

Capital expenditure updates, especially by the largest midstream enterprises, are generally projected to maintain financial support for long-lead-time ventures, especially those considered crucial. Projects judged non-essential will be canceled or pushed into the future, to be revisited when more conducive environments return.

Midstream giant Kinder Morgan carved 29% from its 2020 capex budget

An example of what is conceivable at diversified businesses was clearly demonstrated by Kinder Morgan Inc. on April 22, when it announced a 29% reduction in its 2020 capex. The company carved $700 million from its formerly $2.4 billion capex budget.

It is likely that other diversified behemoths will announce substantial reductions in their 2020 capex budgets during upcoming earnings presentations.

Gathering and processing capex revisions are likely to surpass 40% for the segment

The gathering and processing, or G&P, segment has had the largest number of announced capex decreases, with further announcements expected during earnings season. Presently the G&P group of 16-companies exhibits an aggregated consensus expectation for 43% lower capex in 2020. This dramatic drop is similar in scope to the fall-off in G&P investment in 2016, in the heart of the last oil collapse.

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 the recently released revolver study many of the transportation enterprises have concentrated exposure to crude oil, oil sands, refined petroleum, NGL, and other liquids, all of which are challenged by oversupplies and decreased demand.

The 14-companies in the transportation and storage segment together reveal the possibility of a 24% or greater decrease in 2020 capex. Those with the greatest exposure to liquids such as MPLX LP, Magellan Midstream Partners LP and NuStar Energy LP may reduce capex between 30% and 50% compared with 2019.

Considering that much of the midstream industry has yet to release updated capital investment guidance, the cumulative adjustments to capex for midstream segments and the entire industry could be considerably different by the end of earnings season.

Regulatory Research Associates is a group within S&P Global Market Intelligence.

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