The pandemic-inflicted oil demand crash and price collapse did not spare any segment of the oil industry. U.S. drillers and refiners cut oil and fuel production after demand plunged, while the entire oil and gas sector slashed capital budgets to preserve cash amid low oil and gas prices. The crisis spilled over to energy infrastructure, where oil and gas pipeline operators deferred or outright canceled projects and also reduced capital expenditure (capex) plans.
But it’s not all doom and gloom in the American midstream sector. Some pipeline operators with pipes already in the ground will see the value of their existing pipelines rise amid a looming scarcity of infrastructure, analysts say. The capex cuts and canceled projects would also add to the so-called scarcity value of the already operational oil and gas pipelines. In addition, the reduced investments of pipeline operators are set to boost their free cash flow and financial resilience, industry analysts, and credit rating agencies reckon.
Oil Crisis Didn’t Spare The Midstream Sector
On the face of it, the U.S. midstream sector is in as much trouble as the upstream or downstream are. Companies were forced to postpone investment decisions on pipelines or scrap projects because of unfavorable economics as they looked to cut expenditures and as fuel demand crashed in the pandemic.
After the oil price crash in March, pipeline infrastructure companies started to announce deferrals of final investment decisions and start-up dates for planned oil and gas pipelines, especially in the Permian, which suddenly found itself with additional overbuild of capacity as production and consumption of oil struggled to recover from the pandemic-driven crisis.
One of the latest announcements of a canceled oil pipeline came from Enterprise Products Partners, which said in September that it was scrapping the 450,000 barrels per day Midland-to-ECHO 4 crude oil pipeline project.
Moreover, pipeline project approvals, already slowed down by court litigation from environmental and indigenous groups, could become even slower with the upcoming Biden Administration which has pledged to prioritize clean energy investments.
The Scarcity Value
“We recognize that a potential change in the administration could create headwinds for the industry and for Plains. However, it could also bring benefits, particularly for those with pipe in the ground,” Willie Chiang, chairman and chief executive officer of Plains All American Pipeline, said on the Q3 earnings call a day before the U.S. presidential election in November.
The change in administration in 2021 could lead to additional regulation and a slower process to approve oil and gas infrastructure permits, Plains All American said in its investor presentation last month. This could impact the pace at which oil and gas producers develop resources, but it “should also make pipe in the ground more valuable,” the company noted.
In places like North Dakota, a potential shutdown of the Dakota Access Pipeline could mean an even higher value for other operating pipelines. The Dakota Access oil pipeline carries around 40 percent of the Bakken oil production to refineries and markets. There’s a good chance that Dakota Access could be ordered shut, Allyson Cutright, director of the global oil service at consultancy Rapidan Energy Group, told The Wall Street Journal.
According to the latest figures from the North Dakota Pipeline Authority, 76 percent of the crude oil from the Williston Basin—including North Dakota, South Dakota, and eastern Montana—was transported via pipeline in September 2020, while crude-by-rail transport accounted for 15 percent of oil transportation.
Cash Flow Boost
Apart from scarcity value, American pipeline operators are set to benefit financially from the capex cuts they have made after the price crash earlier this year.
Kinder Morgan, for example, said this week in its 2021 outlook that it expects its nearly 30-percent cut in capital spending for 2020 to boost distributable cash flow (DCF) less discretionary capital expenditures by $160 million compared to the original budget.
Plains All American’s Chiang said in the Q3 earnings release last month that the company had “reached an inflection point where we expect to generate meaningful levels of Free Cash Flow after distributions.”
Many midstream companies in North America are entering 2021 with improved finances, Fitch Ratings said in a report last week.
“Entering 2021, much of Fitch’s midstream portfolio has an improved liquidity position and a lighter maturity schedule, leaving those issuers better positioned (versus one year ago) should unexpected economic or severe commodity price weakness materialize. Furthermore, reduced capex budgets have improved cash flow profiles, and Fitch expects 2021 median FCF for midstream to be positive,” the rating agency said.
The outlook on the North American midstream is improving, despite uncertainties about a potential impact on pipeline transportation commitments due to bankrupt upstream firms, and despite the uncertainties about the wider supply-demand picture next year, Fitch noted.
This year’s crisis may have changed the global and U.S. energy landscapes forever, but the American midstream could see some financial benefits from the downturn.