The energy industry in North America is in crisis. COVID-19 remains a remarkably potent force, stifling a genuine rebound in demand for crude oil and refined products — and the broader U.S. economy. Oil prices have sagged south of $40/bbl, slowing drilling-and-completion activity to a crawl and imperiling the viability of many producers. The outlook for natural gas isn’t much better: anemic global demand for LNG is dragging down U.S. natural gas prices — and gas producers. The midstream sector isn’t immune to all this negativity. Lower production volumes mean lower flows on pipelines, less gas processing, less fractionation, and fewer export opportunities. But one major midstreamer, Enbridge Inc., made a prescient decision almost three years ago to significantly reduce its exposure to the vagaries of energy markets, and stands to emerge from the current hard times in good shape –– assuming, that is, that it can clear the major regulatory challenges it still faces. Today, we preview our new Spotlight report on the Calgary, AB-based midstream giant, Enbridge, which plans to de-risk its business model.
Spotlight is a joint venture of RBN Energy and East Daley Capital Advisors. With the support of Oil & Gas Financial Analytics, Spotlight reports provide “deep dives” into the fundamentals that shape the outlook for midstream energy companies and are included as part of our Drill Down report series, which is available to RBN Backstage Pass members. Spotlight should not be viewed as investment advice.
“No risk, no reward.” It’s one of the oldest business adages out there, and there’s a lot of truth in it. But in a time of pandemic, demand destruction, production shut-ins, and capex cutbacks, there’s also a lot to be said for minimizing your company’s exposure to commodity price volatility, supply/demand imbalances, and the other market ups and downs faced by many energy industry players. The midstream sector, with its fee-based business model and contract protections such as minimum volume commitments, is generally less exposed to the industry’s scariest volatility than producers, oilfield service companies, and refineries, but even midstreamers face varying degrees of risk, depending on the particulars of their assets and their business structure. For evidence, consider Enbridge, North America’s largest energy infrastructure firm, which since December 2017 has been implementing a defensive strategy to minimize its exposure to commodity price risk and ramp up its reliance on long-term, fixed-price contracts.
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