US midstream faces renegotiations: Deutsche Bank

OREANDA-NEWS. December 18, 2015.  Low commodity prices are forcing oil and gas producers to renegotiate terms with midstream operators at lower rates, leaving midstream operators tied to a certain basin or only a few key customers particularly susceptible, according to a Deutsche Bank presentation today.

Bankruptcies by small independent producers tend to force midstream operators to renegotiate contract terms at current, lower market rates, said J.P. Hanson, a managing director at Houlihan Lokey's financial restructuring group in the presentation. In cases where a producer must renegotiate a pipeline contract, they may opt to push lower volumes on the line, negotiate lower fees, or both.

"The midstream cycle is lagging the upstream cycle, and you're going to see pockets where there are weaker players, less diversified players in midstream with fewer contract counterparties and those contracts are facing renegotiation," Hanson said. While some renegotiated contracts may offer higher incentive fees on the back end of the contract, it's not helping midstream operators in the current low-price environment.

"They are suffering with lower throughput volumes at lower feed levels, and we're also seeing outright contract rejections or renegotiations," he said.

In a note to investors, Deutsche Bank analysts reiterated a preference for large midstream providers with several large contract holders. At the same time, the analysts concluded that long-haul contracts are more likely to be broken than deals closer to the wellhead, as "producers are thus incentivized to come to a negotiated agreement versus risk shut ins."