For many midstream companies, the experience of the past 12 months has been akin to falling down a flight of stairs. The fortunate sit at the bottom — stunned a bit, with arms and legs akimbo — and gradually determine that they’re generally alright, and that they’ll be more careful next time. The less lucky? They’re banged up and bloodied, and maybe headed to the ER and, after that, weeks of physical therapy. But were the “fortunate” really just lucky? Or were they in better shape, more athletic, more prepared for any eventuality? And what about companies when they’re hit hard with a sudden, negative shift in market conditions, out of the blue? Today, we discuss highlights from the second part of East Daley Capital’s 2021 edition of Dirty Little Secrets report, which examines the assets and outlooks of 26 leading midstream companies. We’ll focus on two representative midstreamers: Energy Transfer and EnLink Midstream.
As we said a few weeks ago in Down So Low, our blog about the first part of the report, the events of 2020 shook the North American midstream sector to its core and up-ended many midstreamers’ plans and expectations for the first half of the 2020s. A year ago, pre-pandemic, there was a general consensus among midstream executives that the boom years for energy infrastructure development were beginning to wind down; that the sector was entering an era of top-to-bottom reevaluation and rationalization; and that capacity was being overbuilt in some areas, most notably crude pipelines out of the Permian. All that remained true as COVID-19 took root and spread, but all kinds of new, troublesome issues arose, many of them related to the fact that less crude oil and refined products were being produced and transported by pipeline. Natural gas and NGL production and pipeline flows morphed too.
In Fight or Flight: Taking Stock of the Midstream, the 2021 edition of the Dirty Little Secrets report, our friends at East Daley again assess the challenges that individual companies — and the broader midstream sector — are up against through their Treadmill Incline Intensity (TII) index. The index (see Figure 1) builds upon a granular review of each midstreamer’s assets (gathering systems, processing plants, long-haul pipelines, fractionators etc.) to help determine how tough a time the company in question is likely to have in maintaining its earnings over the next four years — the steeper the incline, the harder the workout.
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