Evaluating midstream companies—their assets, their value, their prospects—is a complicated task. It’s not enough to rely on the public face that companies put forward; typically, they highlight their strengths and minimize their weaknesses. To gain a fuller understanding of midstreamers, you need to poke around, consider their individual assets, and assess the status and outlook of the various production areas they serve. Asset location matters for a lot of reasons, but mostly because midstream infrastructure serving a thriving basin—the Permian and Marcellus, for instance—will contribute a lot more to a company’s bottom line than assets serving an area in steep decline. Today we conclude a blog series that highlights key takeaways from East Daley Capital’s new, detailed assessment of more than 20 U.S. midstream companies.
In Part 1, we discuss the first of three thematic insights we gleaned from the East Daley report, namely that a number of supply-push contracts for crude oil and natural gas pipeline capacity will be expiring in the next few years, and that in many instances the likely terms for contract extensions or renewals may be much less favorable to the pipeline owners. In Part 2, we looked at a second theme from the report: that vertically integrated midstreamers tend to do better than those whose facilities are scattered and disjointed. It turns out there is real value in ownership of start-to-finish midstream assets, beginning with gathering and processing (G&P) assets that can serve as “force multipliers” if they feed hydrocarbons into company-owned gas and natural gas liquids (NGL) pipelines, fractionators and NGL/“purity product” storage facilities. (More information on the East Daley report, which runs more than 100 pages, is available here.)
There’s no denying that vertical integration is a positive when the basins a midstream company serves are enjoying favorable production economics and producing at a break-neck pace. But what if they’re not? Or what if some are and some aren’t?
In the past two and half years or so, low prices for crude oil and natural gas have separated the wheat from the chaff among production areas. Some basins that were economic and bursting with activity when crude was selling for $100/bbl or gas prices were topping $6/MMbtu are struggling in today’s environment, with prices half those levels. Other basins are doing very well though; their resources are top-notch, and producers active in them have developed ways to wring extraordinary volumes from their rocks at lower and lower per-barrel or per-cubic-foot costs.
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