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Against the Wind - Assessing Midstream Company Performance After a Decade of Record Investment

After a decade in which unprecedented upstream production growth triggered massive investment in infrastructure to get crude oil, natural gas and NGLs to market, 2020 is a major inflection point for the U.S. midstream industry. The good news is that after peaking at a whopping $37 billion in 2019, midstream capital expenditures are forecast to steeply decline over the next few years as the lion’s share of the infrastructure needed to gather, transport, process, and store current and expected hydrocarbon volumes has already been built or is nearing completion. And, despite continued cutbacks in capex by exploration and production companies, output is still forecast to rise in 2020, which should boost earnings growth for the midstream sector. But all midstream companies aren’t alike, and the prospects for individual entities vary widely because of the specific basins and hubs where they’ve decided to build, acquire, expand or divest. Today, we analyze the headwinds and tailwinds these companies will experience, and how their decisions over the past few years will help determine their prospects.

As we said a couple of weeks ago in Farther Up the Road, while all midstreamers are impacted to some degree by what happens to the broader energy industry on a macro-level, the relative success of each company is heavily influenced by the myriad micro-level actions its leaders take. Put another way, the financial outlook for each midstreamer is, in many ways, the sum of the prospects for the specific set of midstream assets it has bought or constructed, and an informative way to assess each company’s financial future is to focus on its asset-level fundamentals.

Assessing the net impact of headwinds from legacy asset declines and the tailwinds from efficient capital spending on new infrastructure in recent years is critical in identifying which companies will be top performers through the early 2020s — and which will struggle. But an in-depth understanding of the midstream industry going forward requires a comprehensive analysis of the many strategic decisions that each of these companies have made. That’s why we’re partnering with our friends at East Daley Capital on a series of Spotlight Reports, each of which will examine in detail the earning power of the midstreamer’s unique portfolio of pipelines, storage and other assets.

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