As some U.S. midstream companies heed calls for slashing spending and investor payouts to weather collapsing oil prices, those tools — and more drastic actions like corporate simplification and consolidation — may not be enough to keep the pipeline industry bankruptcy-free, energy industry lawyers and analysts said.
"There will be pain and insolvencies," Simpson Thacher & Bartlett LLP attorney Robert Rabalais said in an interview. "It's going to be a death spiral ... if you're over-levered and your assets are specific to a producer or basin."
So far, only Targa Resources Corp., EnLink Midstream LLC and DCP Midstream LP have revised their distribution policies. But reducing those and trimming capital budgets are even more imperative for pipeline master limited partnerships, which already trade at a discount to midstream corporations and still have to unload mountains of debt, according to experts. While guaranteed revenues from long-term contracts help to insulate the midstream sector from direct commodity price exposure, many of those MLPs' assets are concentrated closer to the wellhead where anticipated production spending cuts could jeopardize gathering and processing operations.
A group of eight MLPs — which have not yet announced revised financial guidance amid the oil price collapse — saw its aggregate equity value plummet from $160 billion at the end of 2019 to $39 billion at the end of trading on March 24. Of those partnerships, many have seen their chances of default spike in recent weeks, according to the S&P Global Market Intelligence perception of default signal model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one- to five-year horizon.
Crestwood Equity Partners LP and Enable Midstream Partners have seen the largest increases, with the model indicating they have a greater than 25% and 21% chance, respectively, of default or bankruptcy. Western Midstream Partners LP's risk is lower at 12.5%, but Fitch Ratings on March 23 downgraded the company's long-term issuer default rating and senior unsecured ratings from the lowest investment-grade notch of BBB- to BB+ due to the declining credit health of owner and primary customer Occidental Petroleum Corp.
Those MLPs, however, may not be inclined to publicly lower expectations in the near term should crude oil prices rebound.
"You get the sense from some management teams that there's ... a hesitancy to come out and do something too extreme to the extent you do get a recovery or snapback ... so that things don't seem as dire," Credit Suisse's Spiro Dounis said in an interview.
Still, he added, "at a certain point [management teams] will probably do whatever it takes" to survive beyond pulling the spending and distribution cut levers harder.
According to Robert W. Baird & Co.'s Ethan Bellamy, those measures include consolidation through M&A, transparency about customer exposure, executive compensation reductions and, for any remaining master limited partnerships, reorganizing as C-corps.
"That's an impediment that will prevent many partnerships from recovering equity value when the market rebounds," he said in an email.
Larger, more diversified pipeline companies could find opportunities to take over assets from smaller, more distressed firms, and Rabalais noted that heavyweights like Williams Cos. Inc. and Kinder Morgan Inc. can buy those assets at much cheaper rates during a Chapter 11 bankruptcy process.
"Unless you just want to have that asset, there's no reason to strike a deal when there's still life in the body," he said.
Even the U.S. midstream majors, however, will not come out of the sectorwide downturn completely unscathed.
"Investors once again view midstream companies as riskier than advertised," Credit Suisse analysts wrote in a March 24 note to clients. "While E&Ps feel commodity pain more acutely, midstream companies see each dollar hit to revenue magnified by materially higher operational and financial leverage. ... We'd advise investors not to assume a return to average multiples once the market 'normalizes.'"
Since the end of 2019, the top 10 largest U.S. pipeline companies have seen their combined value slump from $288 billion to $135 billion as of the March 24 market close, according to an S&P Global analysis, and Credit Suisse said those companies may not have bottomed out just yet.
"In terms of decline rates, some [investors] are planning on 20% volume declines in some cases," the note said. "We don't believe most of midstream is pricing in anything near that level yet."