Even as crude oil and natural gas prices begin to rebound from their recent lows, we are seeing continued financial stress in the oil & gas sector. In recent months, Linn Energy, Chaparral Energy, Penn Virginia, Halcón Resources, and Breitburn Energy Partners have all filed Chapter 11. Financial concerns are not confined to the Upstream segment as Midstream players such as Plains All America Pipeline and Azure Midstream have seen their bonds downgraded by the rating agencies.
The oil & gas sector is an energy intense busines - no pun intended. For example, in the Eagle Ford, a Producer of 200,000 barrels per day of crude oil and 500,000 Mcf per day of natural gas will spend an estimated $1 million annually on power from the grid. The Midstream segment is much more “grid-power” intensive; for example a Midstream company processing 500,000 Mcf per day of natural gas will spend as much as $30 million annually on power.
While Midstream operators’ financial performance is not nearly as sensitive to commodity prices, it is highly dependent on their upstream customers’ ability to meet their commitments for delivery and payment. In a recent bankruptcy case, Sabine Oil & Gas was given approval to reject its contracts with Midstream service provider Nordheim Eagle Ford Gathering, LLC, an affiliate of Cheniere Energy Inc. It’s assumed that Sabine and Nordheim will negotiate some new arrangement, but whatever the outcome, it is likely to result in reduced cash flow for Nordheim.
The financial leadership of Midstream operators should be aware of their power supply contract terms, particularly those in regards to financial assurance or collateral, financial covenants, volumetric requirements and swing tolerance provisions so as to avoid being blindsided. The problems being experienced in the upstream segment may begin to trickle down to the Midstream segment.