Plains All American Pipeline LP’s (PAA) shares fell about 10% following its second-quarter earnings call on Aug. 5 where it indicated distributions might remain flat until 2017.

Additionally, Plains commented that midstream infrastructure may be at an overbuilt point. This “may have set off an alarm bell with investors that extends beyond PAA and PAGP [Plains GP Holdings] units, and beyond this week,” said Jeff Birnbaum, a senior analyst at Wunderlich Securities, in a research note.

After the comment, the midstream energy market sold off broadly, indicating the insight “could be troubling for go-forward MLP performance broadly,” Birnbaum said.

The takeaway from both Plains’ comments and the market reaction is that ongoing low oil prices could have a wider-ranging effect on the sector than originally anticipated, said Bernard Colson, senior analyst for MLP at Oppenheimer, in an “Equity Research” note.

“Lower oil prices signify lower demand and result in lower production volumes,” Colson said. “Our concern is that a low cost of capital and high crude prices in prior years have led to overcapacity. Persistent weakness in demand lessens the need for additional infrastructure.”

Additionally, the market’s reaction to the news indicated that “that the market has not fully appreciated the effects of this low crude oil price environment on liquids-focused MLP unit prices,” Colson said. “As other MLPs evaluate 2016 prospects, we believe they, too, will have to come clean about what 2016 looks like barring a significant crude oil price recovery.”

Before the reaction to Plains, it was thought that “this outlook was largely baked into stock prices,” Colson said, adding, “PAA’s disclosure and subsequent beating prove us wrong. We will be re-evaluating our ratings/price targets as second-quarter 2015 reporting season continues.”

Plains’ comment echoed earlier sentiment from Robert W. Baird & Co. Inc.

In a late-June sector update on MLPs, analysts Ethan Bellamy and Fischer Van Handel said, “We are increasingly bearish on mid- to long-term infrastructure investment opportunities as production slows, commercial participants saturate opportunities in larger projects and flush PE/public entities chase a dwindling opportunity set.”

In other words, “onshore transportation is headed toward built-out if not overbuilt,” with certain exceptions, including “Northeast connections, steering gas volumes to LNG exports and Appalachian reversals.”

According to the sector update and a Baird research note following Plains’ earnings call, the outlook hasn’t changed much due to Plains’ comments.

“We have previously highlighted our bearish bias on MLPs through Halloween as seasonal headwinds on both MLPs and crude oil persist,” the note said, while adding that “the generally negative turn on energy sentiment has come harder and faster than we had anticipated.”

Bright Spot

Though the market has reacted negatively to the comments and to Plains’ cuts in distribution growth, the news isn’t a death knell.

“We see the outlook from Plains as indicative of deferred rather than eliminated growth, and a prudent course of action by management to reduce distribution increases in favor of DCF coverage,” Baird said.

Additionally, though the infrastructure outlook has pulled back, “we are more bullish, accordingly, on M&A prospects as small/mid-cap MLPs hit capex roadblocks and may seek value through consolidation,” Baird said.

“We expect bidding wars to emerge led by Energy Transfer and Kinder Morgan. Ultimately, micro and small cap players have a good put option backstopping valuation in the form of bids from the empire-builders,” Baird added.

Contact the author, Caryn Livingston, at clivingston@hartenergy.com.