In episode 3 of our Swings & Roustabouts series, we looked at the current reality of upstream oilfield service companies by analyzing Q2 earnings calls of 10 companies within that sector. This week, we take a look at midstream oil and gas companies and what their current reality looks like. While midstream companies are susceptible to the unstable oil price, the effect in this space is not as severe as on the companies in the upstream sector. This is mainly due to long-term contracts with “take or pay” or “minimum volume commitment” provisions that guarantees payments regardless of volumes.
In this report, we take a look at the Q2 earnings reports of companies operating in the midstream sector in the US. From this, we get a better idea of what the sector looks like at this stage in 2019. We identify some trends, including their financial performance, their outlook for the remainder of 2019, and common threads in terms of strategic direction.
Companies Surveyed
The Q2 earnings reports of 14 companies and partnerships that operate in the US midstream market were analyzed. This included companies deemed as large (annual revenue greater that $5 billion), medium (annual revenue between $1 billion and $5 billion), and small (annual revenue less than $1 billion). All of the companies are headquartered in, and have the majority of their operations in, North America.
All of the companies offer a variety of products and services, with all of them transporting more than one type of commodity, while also owning pipelines and terminals. The main fuels transported and stored by the companies surveyed are crude oil, natural gas, gasoline and carbon dioxide. The main findings of the analysis are discussed below.
Common Trends
Consistent Increase in Net Income
The US midstream market experienced a very good quarter. All 14 companies analyzed reported an increase in net income when compared with Q2 2018. It would appear that the midstream sector is weathering the volatility of the oil and gas market better than upstream operators and contractors. As mentioned above, the midstream sector regularly enters into contracts that guarantees a minimum payment based on volumes moved and stored.
When the oil price decreases, midstream companies that have “demand-pull” pipelines may also benefit from the increased demand caused by a lower oil price. In general, increased upstream production creates a higher demand for transportation and storage, leading to more opportunities for midstream companies. In fact, with Texas and Louisiana basins experiencing higher outputs, all the companies that operate in these areas experienced fiscal and operational growth in 2019.
Benefit from Increase in Shale Gas Production
The recent shale boom in the Permian Basin in Texas has led to an abundance of shale gas being pulled from the ground. In fact, so much gas is being produced by hydraulic fracking that companies are burning off, or flaring, excess gas. This increase in gas production has led to a greater demand for pipelines and terminals to transport the gas to demand centers.
Midstream companies have benefited from this demand with some reporting that they are operating at close to full capacity. Almost all the companies surveyed that operate in the natural gas sector viewed the booming shale market in Texas as an opportunity for growth.
Increased Investment in New Assets
Many of the companies surveyed, from those deemed as large to those deemed as small, have recently invested in the building of new assets. The shale boom in the Permian Basin, as well as overall increased oil and gas production has increased the demand for pipelines and storage facilities. With all the companies analyzed reporting increased new incomes and operational growth, it appears that companies are heavily investing in new capital projects. This should be done with caution though, as the common view is that there may be a pipeline overcapacity in some basins in the near future due to everyone wanting a part of the shale gas profits.
A lot of this investment is focused on Texas and Louisiana, with the aim of putting infrastructure in place to transport oil and gas from the field to the coast to be exported around the world. With gas production in the Permian increasing by 120 per cent since 2016, and regulations and safety considerations meaning that companies with excess gas cannot simply vent it into the air or burn it all off in flares, finding takers for it is important. In fact, the situation became so dire earlier in 2019 that the price of gas fell into the negatives. Investing in infrastructure to take advantage of this need is a strategic initiative for a number of the companies surveyed.
A Focus on Cost Efficiency and Operational Excellence
While the industry saw positive returns in Q2, there is still an emphasis on exercising cost discipline. The volatility of the oil price ensures that companies throughout the value chain need to proactively hedge against a downturn as seen in 2014. The market has moderately stabilized since then, but remains susceptible to a sudden downturn. Companies within the midstream space are acutely aware of this and most of the companies surveyed highlighted the need to cut operational costs where possible.
A big aspect of driving down these costs is the implementation of operational excellence initiatives such as the adoption of technology. The oil and gas industry is increasingly embracing technology as a means to improve operational efficiency and drive down project costs. The midstream sector is no different as more and more companies look to digitize their processes.
A Positive Outlook
All 14 companies surveyed had a positive outlook for 2019 and 2020. All were bullish about their current positions in the market, as well as investments that they have made into growing their infrastructure footprint. One company stated: “These are exciting times… with booming U.S. natural gas and oil production projected to grow more than 30 percent through 2030, our North American footprint positions us extremely well in both the near and long term as a leading infrastructure provider for those and other essential energy products.”
Analysts project that future natural gas infrastructure opportunities through 2030 will be driven by greater demand for gas-fired power generation across the country (forecast to increase by 13 percent), net LNG exports (forecast to increase more than five-fold), net exports to Mexico (forecast to rise by 57 percent), and continued industrial development (up 18 percent), particularly in the petrochemical industry. All these variables mean that the midstream sector is poised to continue seeing positive returns.
In Conclusion
If history has taught us anything it is that the promise of growth and stability in oil and gas cannot be trusted. With that said, the midstream oil and gas sector appears to be in a good position at the moment. All 14 companies surveyed showed good financial returns, with many of them reinvesting those returns in infrastructure to service the increasing demand for gas pipelines and storage in the Permian Basin. But, while there has been an increase in investment within the sector, a major strategic focus is the drive for operational excellence. This drive stems from a need for companies to keep operational costs in check and to ensure work is done in the most efficient way.
Companies are implementing a strategy of an expanded footprint to ensure continued success in this market where their services are in high demand. While doing this though, companies must ensure that they have safe and reliable operations. This is to satisfy regulations, and to ensure the integrity of their operations. The implementation of digital technology is one way to address the concerns of safety and equipment integrity. Next time in our series, we explore how the oil and gas industry is moving into the digital space, and has given rise to the Digital Oilfield 2.0.
