Noted philosopher and baseball legend Yogi Berra once observed that “It’s tough to make predictions, especially about the future.” The year just ended proved particularly tough for midstream analysts as commodity price changes whip-sawed the sector.
Tudor Pickering Holt & Co. analysts Bradley Olsen and Jeff Schmidt paused to look back at their predictions as 2014 began, then took out the crystal ball to project trends for 2015.
A year-earlier projection that the key Alerian MLP Index would level off proved true. However, “for most of the year we were dead wrong,” they noted, with the index up 19% through the first three quarters. “But falling oil prices were the ‘black swan’ event that led to a 5% return for the year.”
Other 2014 projections included a restructuring trend for midstream large caps.
“In July, we laid out a specific case for Kinder Morgan to restructure and what that deal would look like and saw a deal announced by August,” the midstream report noted. Kinder Morgan made the biggest midstream deal of the year as the parent absorbed its MLP units into the parent corporation.
A miss included plans announced for new pipeline capacity out of Appalachia’s Marcellus and Utica plays to the Mid-Atlantic states. “Our Marcellus report highlighted the constraints and possible outlets for gas production, but we did not anticipate 5 Bcf/d (billion cubic feet per day) capacity announced to the Southeast, as we view it as less economically driven, to be rolled into utility rate bases.”
Other misses were new pipeline capacity into the Wattenberg play, “just in time for a crude collapse,” the report noted. Another was the wave of MLP IPOs as big energy players such as Shell, Dominion and Rice Energy rolled out public offerings for new midstream partnerships.
Overall, 2014 was “a tale of two markets” for midstream—quarters one through three and the fourth quarter, the report noted.
Turning around and looking ahead, the Tudor analysts made projections for this year:
- Marginal Alerian index performance, “expecting single-digit total returns again;”
- A slower pace of organic project announcements;
- Crude-by-rail transport will be “increasingly relegated to marginal supplier of takeaway capacity;”
- NGL production growth will pull back as the number of active rigs takes a “massive cut, but absolute production still rising.”
Overall, thanks to crude oil’s 50% price drop in 2014’s second half, the “underlying growth outlook for production, and consequently midstream infrastructure, has declined dramatically” as the new year begins. The analysts say already contracted projects will move ahead, “however new project announcements will be few and far between in 2015.”
Domestic gas liquids “have been smacked” but things will improve this year, the report projected.
“It’s hard to imagine price getting better in today’s bloodbath, but NGL export capacity will increase 3x on the Gulf Coast” between third-quarter 2014 and first-quarter 2016, it noted. “This combines with reduced production growth as liquids-rich basins drop rigs. As a result, we see U.S. [NGL] prices moving up vs. WTI [West Texas Intermediate]…”
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