They say the night is never darkest than in the middle of it, and with commodity prices’ plunge in recent months, some investors say we’ve made it to the mid- night hour.

The midstream industry is set to take a more cautious approach in 2015 in response to the downturn in crude and liquids prices, but that doesn’t mean there won’t be steady activity in the sector.

The two largest natural gas processors and NGL producers in Midstream Business’ most recent midstream rankings, DCP Midstream Partners LP and Enterprise Products Partners LP, both expect to keep an eye on the bottom line while preparing for the future through growth projects.

“In response to the industry downturn, we’ve shifted our focus to being prudent in the near term, with a strategic focus on capital efficiency, operational reliability, contract reformation and expense management,” Wouter van Kempen, chairman and CEO of DCP Midstream Partners, said during a recent conference call to discuss fiscal 2014 earnings.

Continuing projects

This prudence includes closer management of distributions, capital spending and dropdowns in the coming months. Meanwhile, DCP Midstream Partners will be moving forward with more than $300 million in new, mainly fee-based, projects this year.

“Due to uncertainty around our producers’ capital budgets, we plan to prudently manage our capital spend while watching their drilling programs, so that we do not get ahead of them,” Bill Waldheim, outgoing president of DCP Midstream Partners, said during the call. “We’ll remain flexible, preparing for future opportunities around our footprint, like securing new plant permits and ordering long lead time equipment so we can quickly ramp up, if and when needed.”

Among the projects on DCP Midstream Partners’ plate is the Panola NGL Pipeline, in which it is a joint-venture partner with Enterprise, Anadarko Petroleum Corp. and MarkWest Energy Partners LP. Enterprise will operate and own a 55% interest in the system, which will run 181 miles from Carthage, Texas, to the Mont Belvieu, Texas, NGL hub.

“We are very focused on controlling costs, while at the same time working to develop new projects to add value for our investors,” Mike Creel, CEO of Enterprise Products Partners, said during a recent conference call to discuss fiscal 2014 earnings.

Both Enterprise and DCP Midstream Partners anticipate that their current assets will help them steer clear of danger while prices remain challenged.

“We believe our fee-based, integrated and diversified business model positions us to succeed in a challenging commodity price environment such as we have now and our financial flexibility and healthy distribution coverage provides the ability for us to continue distribution growth while pursuing our growth plans,” Creel said. The company has $6.1 billion of organic growth projects under construction that will be completed in 2015 and 2016, he added.

Where will prices go?

The more judicious approach of both companies makes sense, since there isn’t much clarity—yet—on where prices are headed.

“Global energy markets are somewhere between turmoil and chaos,” Jim Teague, Enterprise Products Partners’ COO, added during the call. “We have no clue how low prices may go or how long they will stay depressed, nor does anyone else.”

The company has a marketing function in each of its business units that is designed to take advantage of opportunities that arise from market fluctuations. “The Enterprise business model thrives on dislocation and adding value by capturing opportunities when there is chaos,” Teague added.

The regions that Teague, who will succeed Creel as CEO upon his retirement at the close of the year, expects his company to be the most active during the downturn are the Eagle Ford and Permian due to their higher netbacks resulting from their proximity to the Gulf Coast, end-use markets and established midstream infrastructure.

These should help Enterprise manage the downturn since the company is a key midstream provider in each region with connections to other systems the company owns that will help to provide flow assurances and market choices.

Texas’ backyard

“If you have to go through a downturn, the Eagle Ford and Permian are not bad places to have in your backyard. There’s no doubt that 2015 will present significant challenges across the entire up- stream and therefore related midstream value chain,” Teague said. “Margins will be thinner and landing new projects will be competitive. However, all of the assets we have recently constructed or have under construction are backed by long-term commitments.”

The bulk of these new projects also have volume commitments that are set to ramp up over the next few years, which will help to provide stable and increasing revenues.

Waldheim, who retired on May 1, also stated that DCP Midstream Part- ners’ assets in the Eagle Ford will help the company weather the downturn.

“The Eagle Ford continues to see strong production due to its economic cost of drilling and location relative to the Mont Belvieu market. [We] are in the core area of the Eagle Ford. We are very pleased with the Eagle Ford’s current and future projected earnings growth, even in the current environment,” he said.

Teague noted that Enterprise stands to benefit from its crude assets being connected to the Cushing hub, which is more active due to the dislocation of waterborne barrels caused by the price downturn.

These kind of market cycles are just the way it’s always been ... We’ve picked up a few prizes in past downturns, as people found themselves unprepared or in denial about down cycles,” Teague said. Such past deals include the Mid America (MAPL) Pipeline and GulfTerra Energy Partners LP.

Though Enterprise has been active in the M&A market in past downturns, Creel stated the company would not chase deals. “If opportunities present themselves [with] assets that fit our system, we will take a look at them. M&A has to compete with our organic projects as well. I don’t think our philoso- phy has changed over time; I think the markets change over time and we act when it makes sense,” he said.

The positive to take from this is that Enterprise has performed well during past downturns and thrives on change, Teague added. In addition, he said that the U.S. oil and gas industry will continue to produce as it remains a focal point on the global stage.

“Global markets understand that we have more hydrocarbon resources that we’re going to need and much of the world’s production comes from some very unstable places in the Middle East, Venezuela and North Africa. They also understand that [low] oil prices aren’t going to help many of these countries’ geopolitical dynamics. As demand grows, weak economies won’t be here forever, and the U.S. continues to move forward from a position of shortage to one of surplus. Rebalancing of global markets is going to continue to take place, and the U.S. oil and gas industry will not be denied,” Teague said.

‘Must-run business’

This is a similar viewpoint to the one held by van Kempen, who noted that the oil and gas industry is a “must-run business” that may slow down, but won’t stop.

Both Teague and van Kempen highlighted the integrated nature of their companies’ assets as a prime reason they expect to be able to weather any downturn as they are designed to open new opportunities and revenue streams. An integrated approach allows companies to reach critical mass and improve efficiencies while also providing more services to customers.

“It would be nice if prices were higher and the environment was such that money was falling from the sky. Those days are over for now. Today, we are in an environment where you have to be relentless about managing your costs and where you have to look for and earn every penny. Looking for and picking up pennies is a lot harder than catching money falling from the sky. Some have never done it,” Teague said.

In many ways, the best way a company can prepare for a downturn is to take advantage of business opportunities that are presented during an upswing. Having a diversified portfolio and a presence in various regions of the country is the most successful way a company can prepare for a downturn while also benefitting from the optionality this presents when business
is stronger.

This approach benefited both companies as they posted strong earnings in fiscal 2014. DCP Midstream had record earnings for the fiscal year with EBITDA of $536 million, supported by growth in its natural gas services and NGL logistics segments.

“[Growth in the gas services] segment was driven primarily by growth from our Eagle Ford system and the operation of our fee-based O’Connor plant in the DJ Basin,” Sean O’Brien, DCP Midstream Partners’ CFO, said during the conference call. “[The NGL logistics segment growth] was driven primarily [by] the dropdowns of the Sand Hills and Southern Hills pipelines and the ramp up of Front Range and Texas Express pipelines.”

Fee-based revenues

Enterprise reported record adjusted EBITDA of $5.2 billion for the fiscal year, compared to $4.7 billion in addition to a 10% increase in gross operating margin to $5.3 billion from the prior year. Randy Fowler, the company’s new chief administrative officer, stated that gross operating margin is a stronger indication of a midstream company’s performance since it isn’t dependent on commodity prices in the same way as revenue, operating costs and expenses.

“In general, higher commodity prices will increase revenues attributable to the sale of NGL, natural gas, crude oil and refined products, while, at the same time, also increasing the associated cost of sales, operating costs and expenses. This is why we believe gross operating margin is a better performance-based measure,” Fowler said.

The strong results that both companies posted in 2014 are also indicative of their past performances. Like Enterprise, DCP Midstream has a track record of managing the cyclical nature of the industry. “The DCP enterprise has a long history, approximately 90 years, of prudently managing through the low commodity environments.
We’re well underway on tightening our belts with a strategic focus on prudently managing the DCP enterprise to be an even fitter and stronger company,” van Kempen said.