Upstream woes denting midstream prospects

In wake of weak oil prices, the upstream side of this ‘crude’ world is going through the worst cyclical downturn in years. The Oilholic’s most conservative of estimates sees the situation staying the way it is, if not worsening, for at least another 15 months.

In fact, one feels fresh investment towards exploration and production (E&P) could remain depressed for as much as 18 to 24 months. Both Fitch Ratings and Moody’s have negative outlooks on the upstream industry, as 2015 looks set to end as the year with the lowest average Brent price since 2005.

National Oil Companies (NOCs), bleeding cash reserves in order to stay in the game and put rivals out of it, are maximising existing onstream capabilities. Meanwhile, International Oil Companies (IOCs) looking to cut costs, are delaying final investment decisions on E&P projects at the moment.

As one wrote on Forbes, Big Oil is gearing up for a $60 breakeven oil price for the next three years and capital expenditure cuts of 10%-15% in 2016 with far reaching consequences. Of course, the pain will extend well beyond the obvious linear connection with oilfield services (OFS) and drilling companies.

Global midstream growth is getting hammered by E&P cuts too, according anecdotal evidence from reliable contacts at advisory firms either side of the pond. Most point to a Moody’s subscriber note issued on November 6, that set out the ratings agency’s stable outlook on the US midstream sector, but also suggested that industry EBITDA [Earnings before interest, taxes, depreciation, and amortisation] growth will struggle to cap 5% in 2016.

Andrew Brooks, Senior Analyst at Moody’s, noted: "For the past five years, the midstream industry has rapidly ramped up investment in infrastructure projects to serve the E&P industry's extensive investment in US oil and gas shale resource plays. 

"But now deep cuts in the E&P sector and continued low oil and natural gas prices will limit midstream spending through at least early 2017."

There was a sense in Houston, Texas, US when the Oilholic last went calling in February and again in May this year that midstream companies have already built much, if not most, of the infrastructure required for US shale production. Therefore it is only logical for ratings agencies and analysts to suggest incremental EBITDA growth will slow as fewer new shale and tight oil assets go into service. 

Only thing in midstream players' favour over the next, or quite possibly two, lean fiscal year(s) is the linkage they provide between producers and downstream markets. In Moody’s view this need would mitigate some of the risk of slower growth, even if gathering and processing margins remain at cyclical lows.

"And the midstream sector should be more insulated from contract renegotiation risk with upstream operators having less flexibility to force price concessions on midstream services companies than they have had with OFS firms and drillers," Brooks concluded.

So all things considered, midstream is perhaps not as deeply impacted as E&P, OFS segments of the oil and gas business, but suffering it most certainly is. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Pipeline signage, Fairfax, Virginia, USA © O. Louis Mazzatenta / National Geographic