Pipeline companies, particularly smaller ones, are beginning to feel the effects of depressed oil prices. As prices continue to decline, and hope for a short term turnaround diminishes, pipeline companies have begun to exhaust their options for maintaining a black balance sheet.
As midstream companies (companies which engage in the transportation of oil and natural gas products), pipeline firms are dependent on oil producers and oil sellers for profit. As a result, they are vulnerable to losses if there is a drop in price or production.
Particularly at risk are companies who have staked a large proportion of their profits on one or two contracts. Such exposure tends to be consistent with companies of smaller size which lack the diversified revenue stream to comfortably float a few bad contracts.
One example of such a firm would be Crestwood Midstream, a Houston based operator of various Midwestern pipeline assets. During the period between 2008 and 2010, they signed multiple contracts with drilling firm Quicksilver Resources to gather Barnett Shale oil. Three years later, income from the contracts made up over 10% of Crestwood’s revenue. In 2015, Quicksilver filed for bankruptcy, and was unable to meet its obligations to Crestwood.
Not all of the companies at risk are small however. Williams Midstream, a Tulsa based company with a presence in Houston has estimated that nearly a quarter of its revenues comes through a contract with Chesapeake Energy, an upstream company focused on shale. If Chesapeake were unable to fulfill its obligations, Williams could find itself in a tight spot. As it stands, the establishment consensus is that Chesapeake is in serious, but not irrecoverable trouble. Its valuation has fallen to nearly a 20th of what it was a year ago. Most financial institutions have issued “hold” ratings on Chesapeake stock and have lowered their target prices.
Sixty oil companies have already filed for bankruptcy worldwide. Research firm HIS Inc. estimates that this number could rise to over two-hundred by mid-2016 if oil prices continue on their current trajectory.