The outlook for the energy sector is uncertain, to say the least. Global demand slumped as travel came to a screeching halt earlier this year. The transition to green energy is yet another confounding factor in the equation, making analysis of the industry tricky, but also rewarding to those willing to do the research.
The midstream sector is an interesting niche within the larger energy ecosystem. Here is where it stands in mid-2020.
What is it?
For those that aren't familiar with the terminology, the energy sector is usually divided into three main categories - upstream, midstream and downstream. Upstream companies extract crude oil and natural gas from the Earth. Downstream companies refine crude oil into usable products like gasoline, diesel, jet fuel and others. Midstream companies deal mainly with the transportation of oil and gas from the upstream to the downstream via pipelines and oil tankers. The largest energy companies will have a presence in all three of these categories, but there are plenty of smaller, more specialist companies that operate in just one of the three. Today we will be looking at the midstream sector.
New project plans are typcially being shelved until global demand recovers. This has led to an increased interest in expanding existing networks. For instance, on its latest earnings call, Williams Partners (WMB, Financial) - the operator of the Transcontinental Pipeline - stressed that it is much easier to reach agreements with landowners and environmental groups when developing "brownfield systems" as opposed to developing new systems.
Still, infrastructure spending overall will likely be going down into 2021, since investors generally don't want to spend money to move oil and gas for which there might not be demand going forward. Unsurprisingly, mergers and acquisitions have also slowed down. Even though there are a lot of smaller midstream businesses that are attractively priced right now, management teams are reluctant to acquire more assets.
Kinder Morgan (KMI, Financial) made a point of stressing this on their earnings call. This is somewhat an issue, as there are plenty of businesses looking to unload assets. Plains All American Pipeline (PAA, Financial) announced that it was looking to spin off its non core assets for the right price, although it's unclear who the buyer would be in this scenario. This latest round of earnings calls had one significant motif - spending is being cut across the board and uncertainty is likely to depress investor confidence going forward.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Joel Greenblatt: The State of Value Investing Today
- Warren Buffett's History With Silver
- Warren Buffett's History With Oil
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