Hard to believe, but in a few weeks—right after menorah candles are snuffed out and Christmas trees go back in the attic—we start a new decade. That’s hard to believe.
Things have changed immensely for the industry, and for me, in the last 10 years. What lies ahead for the midstream? You’ll read several prognostications from industry observers in this issue as we do a whip-around of the major shale plays and their particular midstream challenges.
Some analysts have shinier crystal balls than others, but I find a lot of people who get paid a lot of money get things wrong, despite crunching immense piles of data, incredibly complex computer models, and all that sort of thing.
It’s the same thing as TV weather people, who never remind you what yesterday’s forecast was. The one exception to that rule I recall came years ago when the weather guy on a Tulsa, Okla., station observed Oklahoma was getting “lots of partly cloudy today.” His weather segment followed a news story with reporters on location, standing on city streets, knee deep in flood water.
I try to read a lot of analyst reports, and one of my favorites to peruse is Wells Fargo Securities’ excellent Midstream Monthly Outlook. A recent issue gave the following sector forecasts out through 2025:
- A potential global economic slowdown, the U.S.-China trade fight, and overall geo-political instability could keep crude and gas prices range bound, muting the near-term outlook for increasing exports;
- “Given this backdrop, we expect U.S. crude, natural gas, and NGL production growth to moderate. While increased volumes and higher cash flows for midstream companies positioned in growth basins should still materialize, the overall growth trajectory is likely more muted;”
- Widening high-yield credit spreads and rising counterparty E&P risk to midstream players, mostly focused on small caps, tempers the near term;
- Several basins will likely be tight (supply vs. takeaway) for up to three years, “requiring continued infrastructure spending. Disciplined growth capital spending should support long-term DCF [distributable cash flow]/unit growth;”
- Low-cost U.S. hydrocarbons drive long-term export growth; MLP restructuring within the sector may attract institutions back; and
- “Further de-leveraging of balance sheets, continued improvements in corporate governance, and improved ROIC [return on invested capital] should attract outside capital.”
Another point Wells Fargo makes that’s worth noting: “A difficult environment to build pipelines or drill new wells (regulatory, public opposition).” The environmentalist movement has a religious fervor and isn’t necessarily swayed by facts or reason. Think of those people last summer, dangling from Houston’s Fred Hartman Bridge to shut down the Houston Ship Channel.
These projections all sound pretty good, pretty logical. What analysts and forecasters dread—and what will happen eventually—is a feared “black swan event,” which the dictionary defines as “an unpredictable or unforeseen event, typically one with extreme consequences.”
We tend to think of black swans as a negative—the 1973 oil embargo, for example—but they can be positive events too. The stupendous development of the shale plays in the past decade, which turned the U.S. from energy importer to exporter, is a case in point. Who, honestly, saw that coming in 2009?
“This has been an incredible gift to the United States economy, consumers and to the petrochemical industry, and we’re still in the beginning stages,” author and energy observer Robert Bryce told our Jeff Share in an interview featured in this issue. Will it be the gift that keeps on giving?
The winners, the midstream companies that will still be here and thriving in 2029, are the ones that will keep their binoculars up and their powder dry. The forecasts are valuable; executives need to read and heed them.
But this business is not a walk in the park. A black swan may cross your path.
2022-12-08 - Exxon Mobil is also expanding its share program to $50 billion through 2024 from its previous $30 billion goal.
2022-12-08 - Richard Miller began serving as Tullow Oil's interim CFO in April of 2022.
2022-12-08 - This year’s honorees represent companies such as Antero Resources, Continental Resources, Deloitte, Exxon Mobil, Equinor, KPMG, SLB and Tailwater Capital.
2022-12-08 - Natural gas-focused firm launches platform for investments in storage, transport and infrastructure.
2022-12-08 - "We expect 2023 to be another very good year for Kinder Morgan, with strong market fundamentals, continued robust growth in demand," Kinder Morgan CEO Steve Kean said.