Toronto-based BMO Capital Markets draws a parallel between NASA’s white-knuckled Gemini 8 mission in 1966 and the current turmoil experienced by the energy industry.

The mission of astronauts Neil Armstrong and David Scott was to rendezvous and dock with the Agena spacecraft, which had been launched earlier. Much like the meteoric ascent of the oil and gas industry during the shale revolution, the complicated mission proceeded relatively smoothly. But 27 minutes after Gemini 8 docked with Agena, the two connected spacecraft “began to go into a violent yaw and tumble,” according to NASA’s mission report.

Armstrong disengaged the capsule from the Agena target vehicle, but that only made it worse. One of the thrusters had short-circuited during docking and continued to fire, propelling the capsule into a tumble that may have exceeded one revolution per second. Armstrong remained calm, regained control of the capsule by firing all thrusters and the two astronauts ultimately returned safely to Earth, surviving the first true emergency in space. Armstrong, of course, returned to space as commander of Apollo 11 and became the first human to walk on the moon.

BMO’s point: The OPEC commitment to market share and China’s slower growth are creating a feeling of Gemini’s “death roll” for the industry. By remaining calm and making difficult decisions like the crew in the capsule and the team at Mission Control, energy executives can find their way through this tough period as well.

BMO lists these challenges for the midstream:

  • Slower growth means a higher yield, which makes it harder for MLPs to grow;
  • Continuing trend of consolidation of large MLPs burdened with high incentive distribution rights payments; and
  • The dangers posed for certain highly leveraged MLPs with higher interest rates. BMO notes the market struggles encountered by the entire sector already and warns of greater risks the longer this environment persists.

So what’s a midstream player to do? BMO analyzed the 76% dividend cut announced by Kinder Morgan Inc. near the end of last year for answers.

The reduction from 51 cents per share to 12.5 cents per share saves the company $3.4 billion a year in distributable cash flow that can be used to fund projects. It also raised Kinder’s stock price by 6.8% immediately following the announcement.

What triggered the move was the cost of capital, BMO said. A prolonged stock price decline meant that Kinder no longer had the resources to efficiently fund its backlog of projects. The company elected to protect its investment-grade rating, making the return of capital to shareholders a lower priority. While the decision may have been painful, it relieves the company of the need to tap equity or debt markets in the foreseeable future.

And here’s the upshot, in BMO’s view: the dividend cut opens the door for dividend/distribution cuts at other midstream companies wondering how to fund their own project backlogs.

“Time will tell how investors feel about this transaction,” said BMO in its analysis, “but with current equity yields at multiyear highs, few MLPs can accretively fund their growth projects.”

Joseph Markman can be reached at jmarkman@hartenergy.com.