What happened
The stock prices of TransCanada (NYSE: TRP), ONEOK (NYSE: OKE), and Plains All American Pipeline (NYSE: PAA) fell 12.8%, 12.2%, and 13%, respectively, in December, according to data provided by S&P Global Market Intelligence. Simply put, it wasn't a great month for this trio.
But they were hardly alone in the decline. Even conservatively run industry giants like Enterprise Products Partners saw their shares trade lower in the final month of 2018.
So what
There wasn't any huge news about the midstream sector that caused the industrywide headwinds. Which was actually a nice change from earlier in the year when a government rule update set the entire industry reeling. The December decline was somewhat more mundane: The price of oil took a swift tumble, and anything associated with the often volatile commodity went down with it. Investors can be pretty indiscriminate when they are in a selling mood.
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But this could be a case of the baby being thrown out with the bathwater. ONEOK, TransCanada, and Plains are all focused on being toll takers. They charge fees for the use of their assets, so a decline in the price of oil (or natural gas, or anything else flowing through their systems) won't have all that big an impact on the top and bottom lines. It is demand for their assets -- and thus, indirectly, the fuels that pass through them -- that is most important.
There's no sign that demand for energy in the United States and Canada is going to decline. If anything, increasing onshore production and bottlenecks in key producing regions (which are helping to depress oil prices) suggest that more infrastructure is needed. This issue specifically affects Canadian oil sands production and the Permian Basin in the United States. As toll takers, over the long term, building more infrastructure assets to deal with the problem will mean more revenue for companies like ONEOK, TransCanada, and Plains. To put some numbers on the need for new construction, ONEOK has $6 billion in growth spending planned through 2021, and TransCanada has some $36 billion in projects planned through 2023. A little closer to today, Plains expects to increase its 2019 capital spending plan by as much as 64%. And these are just three companies in a much larger industry.
Falling oil prices might have an effect at the margins here, but the long-term picture remains very bright for midstream companies like ONEOK, TransCanada, and Plains All American.
Now what
The volatile price of oil grabs headlines, and the commodity's ups and downs can clearly have a major impact on energy related names, including within the midstream sector. But falling crude prices have a somewhat more muted effect when it comes to fee-based assets in the midstream space. Yes, weak oil prices could have a modest effect on companies like ONEOK, TransCanada, and Plains All American. But their financial results aren't likely to fall off a cliff. And the long-term need to build energy infrastructure in the United States and Canada remains strong.
So investors looking at the price declines in the midstream space today should probably see December's industrywide drop as a buying opportunity rather than a warning that there's underlying trouble at the companies that took a hit.
Check out the latest TransCanada, ONEOK, and Plains All American Pipeline earnings call transcripts.
