Today’s Midstream Market Tactic: Deferring Capital Expenditures
Recent downturns arise reduced costs and complexity among midstream operators
In March of 2014 prior to falling oil and gas prices, analysts’ modest scenario assumed long-term North American natural gas prices will average $6.00/MMBtu and oil $100.00/bbl. Midstream infrastructure investment was forecast to need close to $641 billion over the next 22 years just to keep pace with booming energy production.
For midstream companies, capital expenditure as a percentage of enterprise value increased from 15% between 2004 and 2007 to about 75% for projects forecast between 2013 and 2015.
Dealing with the Pressures
To fund this expansion, the number of master limited partnerships (MLPs) exploded with market capitalization increasing from $60 billion in 2005 to more than $350 billion by 2014. Supercycle, midstream companies sprinted to keep up with the shale gas and tight oil supply shocks and alleviate bottlenecks.
However, the dramatic fall in oil and gas prices beginning in the summer of 2014 shook the situation. Midstream companies continued to invest in their capital expenditure commitments through 2015—the peak of investment—and in 2016, capital expenditure slowed drastically. As midstream companies continue reducing their capital plans in 2017, equity valuations will receive more downward pressure.
Experience in other oil and gas sectors show that downturns create extraordinary threats and opportunities, often leading to waves of M&A activity. Given these circumstances, midstream companies are mandated to continue reducing costs and complexity.
Adjusting the Sails for Success
During the boom, speed was essential; today cost is king. In an effort to reduce costs, most companies initially focus on simplifying administration costs and inventory management. Many operators are refurbishing and upgrading equipment to extend their life and defer capital expenditures.
The most prominent assets are the hundreds of engines and rotating equipment in the field. Many units haven’t been run in years and most are out of compliance. But for a relatively small investment, these units can be upgraded and put back into operation.
This is where TTS Energy Services can help. Our decades of experience paired with innovative technologies dealing with fuel management, controls and the new emissions compliance regulations allow us to optimize your units and bring them back online.
Read more about the first-ever application of GE Frame 7EA gas turbines to a 50Hz electrical system was accomplished through TTS Energy Services’ commissioning services here.