Although take-or-pay contract provisions help insulate midstream cash flows from shut-ins (read more), declining production still presents a risk to energy infrastructure companies as volume-driven businesses. However, commentary from producers so far indicates that production curtailments may not have a significant negative impact on midstream companies. In an April market update call, COP management noted that it will continue to manage its pipeline commitments despite curtailments. Additionally, management expects robust production from shut-in wells in the Lower 48 once they are brought back online. Parsley Energy (PE), which shut-in 5-7 thousand barrels per day (MBpd) in March and April and guided to another 23 MBpd of curtailments in May, does not expect to incur any deficiency payments related to its transportation commitments, implying that the producer will meet any commitments to its midstream service providers. Additionally, the lack of government-mandated curtailments is an incremental positive for midstream. Earlier in the month, the Railroad Commission of Texas voted against enacting statewide production cuts, and the Oklahoma Corporation Commission took no action after hearing arguments for mandated curtailments. Enterprise Products Partners (EPD) CEO Jim Teague was a notable opponent of these measures, citing the negative impact that they would have on midstream. In addition to potentially shutting-in production in an inefficient manner, mandated cuts may have allowed struggling producers to avoid minimum volume commitments and the related deficiency payments to their midstream counterparties.
While the lower commodity price environment and resulting decline in oil production poses a potential threat to energy infrastructure companies, the impact that shut-in volumes will have on midstream cash flows may be relatively muted. As discussed previously, midstream EBITDA forecast revisions have been modest when compared to other sectors of energy, reflecting the stability of their fee-based businesses and take-or-pay contracts (read more). Certainly, midstream providers were in discussion with their customers when forming their outlooks. Curtailments are also temporary measures, and some E&Ps could be incentivized to bring production back online sooner than anticipated given the recent rally in WTI oil prices to nearly $32 per barrel as of May 18. With production declining, larger, integrated midstream companies will benefit from diversified customer bases and commodity exposure. Overall, midstream continues to remain well positioned to weather the current energy downturn, even in the face of curtailed volumes.