How the Midstream Sector Could React if CHK Restructures
Why Energy Transfer and Williams Companies Crashed Yesterday
Midstream companies’ indirect commodity exposure
Midstream companies have indirect exposure to commodity prices through production levels. If crude oil and natural gas prices stay low, upstream producers might cut their production. This decision could result in lower throughput volumes and lower earnings for these midstream companies. In the worst-case scenario, such as an upstream producer going bankrupt, midstream companies might be required to renegotiate their long-term contracts, which entitle them to receive a fixed fee regardless of the volume transferred.
Chesapeake Energy’s distressing situation
Chesapeake Energy (CHK) is one of the largest US drillers, and it’s facing the heat of the energy-driven debt crisis. Yesterday, West Texas Intermediate crude oil fell below $30 a barrel for the second time since the start of 2016 on continued concerns over a global supply glut. The upstream energy giant is in distress, considering its huge net debt of $9.8 billion at the end of the third quarter. CHK has been selling assets and cutting down capital spending to reduce the burden on its balance sheet. CHK might have to restructure if the situation worsens in the coming days.
For a detailed overview on CHK, read Will Chesapeake Energy Succumb to an Energy-Driven Debt Crisis?
How this affects WMB and ETE
If CHK needs to restructure, creditors might demand a renegotiation of contracts with CHK’s midstream partners such as Williams Companies (WMB). WMB’s and Williams Partners’ (WPZ) earnings could be severely impacted if the contracts were dropped or renegotiated. WPZ’s “high level of customer concentration risk with Chesapeake Energy” was one reason for WMB’s and WPZ’s recent rating downgrades by Moody’s. For more detail, read Why Moody’s Downgraded Williams Partners and Williams Companies.
Energy Transfer Equity (ETE), which has announced a merger with Williams Companies, would also be negatively impacted by Chesapeake’s possible restructuring or bankruptcy. This outlook highlights midstream companies’ dependence on upstream producers. ETE forms 0.64% of the Guggenheim Raymond James SB-1 Equity ETF (RYJ).
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