With oil prices continuing to drop despite the recent moves to cut global production, those declines in commodity prices are dragging down every aspect of the industry. Even midstream companies, which are less directly exposed to the daily ups and downs of commodities, are suffering during this epic price rout.
With oil prices dropping below $20 today, and as new estimates of lower oil demand keep coming in, a slew of stocks were down double digits today. Here are several midstream companies and master limited partnerships that saw their share prices drop significantly on the day.
|Company||Price Change (Decline)|
|Enable Midstream Partners (NYSE:ENBL)||(18.4%)|
|EnLink Midstream (NYSE:ENLC)||(11.5%)|
|DCP Midstream LP (NYSE:DCP)||(10.1%)|
|Western Midstream Partners (NYSE:WES)||(9.6%)|
With the entire oil and gas industry in disarray from sharp demand declines and OPEC's swift 180 from unfettered production to a cut of nearly 10 million barrels per day, it should surprise no one by now that the price of oil is going to be extremely volatile on any given day.
Today's price drop below $20 comes after the U.S. Energy Information Administration announced its weekly inventory levels, which were up 19.2 million barrels compared with this time last week. That's above the 15.2 million barrel inventory build last week and well above analyst estimates. Also, the International Energy Administration now estimates that global oil demand in April will be 29 million barrels per day lower than this time last year, a near 29% drop in demand in a couple of months.
Typically, midstream companies are less volatile than other parts of the broader industry because they're paid to move product, usually on a fee basis. That should provide some cover from the ups and downs of the industry.
The trouble for these five midstream operators in particular is that a significant portion of their business is in gathering and processing. This is the first part of the logistics and transportation chain in oil and gas, and tends to be directly tied to the wellhead. If producers were to shut in wells or stop drilling new ones, these would be the first businesses in midstream to feel the pain. Of the five companies here, DCP and ONEOK have the smallest exposure to gathering and processing, as they represent 40% and 25%, respectively, of annual EBITDA. DCP announced earlier this week that it will cut its operating budget and intends to lay off 15% of its staff as a response to this recent upheaval. And that's on top of the cut to its distribution that it made back in March.
Even before price cuts and the coronavirus pandemic, several of these companies were facing some financial strain. Occidental Petroleum is the majority owner of Western Midstream Partners as part of the Anadarko Petroleum deal, and has been looking to unload its stake to raise cash and pay down its debt. It has yet to find a buyer, and it has been weighing on Western Midstream's stock.
Enable and EnLink had already implemented plans to shore up their balance sheets before this recent spate of news. Both companies were carrying high debt loads, and their distributions to shareholders were eating up considerable capital. Even after modest cuts to their distributions earlier in the year, it's probably safe to assume that they will be cut further.
Look, if you're making investments based on oil's daily news cycle, you're either going to lose all your money, your sanity, or both. The entire industry has been put into a tailspin. Even with all these production cuts, it may not be enough to offset demand destruction for the next several months. That also assumes that all 29 of the oil-producing countries and the dozens of companies that would fall under this agreement follow it to the letter of the law, which also seems like a bold assumption.
All of the five companies here are going to take a big hit, just like everyone else in the industry. It's too soon to say which of these companies are going to make it out of this crisis without going through bankruptcy. Right now, the likelihood of insolvency is probably greater than the chance of picking up a stock on the cheap and riding it higher, despite these companies' absurdly high dividend yields today.