What happened
Oil prices continued to crater today. WTI, the U.S. oil benchmark, plunged another 11% by 10:00 a.m. EDT on Wednesday, falling below $24 a barrel, which is a 17-year low. Weighing on oil was the continued shutdown of the global economy due to the COVID-19 coronavirus outbreak and the flood of new supplies coming from OPEC after its market-support agreement collapsed earlier this month.
The continued plunge in crude oil prices is weighing on nearly the entire energy sector, with several stocks plunging by more than 10% on the day. One sub-sector getting hit particularly hard is large pipeline companies, with Kinder Morgan (KMI -0.26%), Williams Companies (WMB -0.04%), ONEOK (OKE -0.41%), and Energy Transfer (ET 0.10%) all tumbling more than 10% by mid-morning.
Image source: Getty Images.
So what
The farther crude prices fall, the more worried investors become that the energy sector will see a wave of bankruptcy filings. We've already seen reports that Chesapeake Energy (CHKA.Q) has hired lawyers and bankers to help restructure its hefty debt load. The concern is that financially strapped oil and gas producers like Chesapeake will also seek to restructure their midstream contracts. That's weighing on Williams Companies, Energy Transfer, and Kinder Morgan since they all have exposure to Chesapeake.
Another concern is that oil and gas drillers are slashing their capital budgets as they adjust to lower oil prices. These activity reductions will impact production volumes in the coming months, affecting the fees collected by midstream assets underpinned by volume-based contracts.
Several midstream companies have already had to adjust their capital spending plans to account for lower future volumes. ONEOK, for example, reduced its 2020 budget by $500 million, a 20% cut at the midpoint, after suspending three recently approved expansion projects. While the company doesn't expect this investment reduction to impact its 2020 growth forecast, it will likely affect the company's results in 2021.
Canada's Pembina Pipeline (PBA -0.03%) has also slashed its investment program for this year, reducing spending by 40% to 50% from its previous guidance. Pembina said it would defer some previously announced expansion projects while removing some discretionary spending from its budget. While the pipeline company doesn't expect this reduction to affect its 2020 earnings forecast, it will likely impact its growth rate in the 2021-2023 time frame, given the timeline of the deferred expansions.
Now what
There's so much uncertainty in the oil market right now. Not only is it unclear when the COVID-19 outbreak will slow enough to ease travel restrictions, but there's also no visibility as to when OPEC might reverse its current course of flooding the already saturated market with more oil. That's leading investors to fear the worst by pricing in a wave of bankruptcies that cut deeply into the cash flows of pipeline companies. Until there's a glimmer of hope that conditions will improve -- which will undoubtedly come as it has in the past -- the current fears will likely continue weighing on pipeline stocks.
The good news is that the sector's giants -- Kinder Morgan, ONEOK, Williams Companies, and Energy Transfer -- all entered this dark period in much stronger financial positions than they did when the last downturn started in 2014. Each company spent the years since then shoring up their financial situations so that they could endure another shock. That doesn't mean this one won't impact them, but it does suggest they can withstand the tough days ahead.
