The free fall in oil prices has pulled down stock prices for public companies that move gas, crude oil and refined products, even though these companies have little or no commodity price risk.
The looming danger for investors is that producers of energy will cut production and would then transport fewer molecules or barrels. Market observers have lamented the performance of Kirby Corp. (KEX) shares, which has moved downward in lockstep with oil prices.
The production downtrend is real: The U.S. Department of Energy notes that total U.S. crude oil production began declining in May 2015, falling from a peak of 9.6 million bpd in April, 2015 to an estimated 9.2 million bpd in November. Energy Department analysts expect U.S. crude oil production to continue to decline through September 2016, with the production forecast of 8.5 million bpd being forecast.
With ongoing requirements for infrastructure, transport companies need to raise capital. When the companies fall out of favor, they face difficulties raising equity, or debt. As a consequence, they seek to preserve cash to fund future commitments to maintain and build out their physical assets.
The financial shot across the bow for transport-related companies came from pipeline and terminals giant Kinder Morgan (KMI), now in a corporate structure rather than a master limited partnership (MLP). KMI cut its dividend by 75% in early December to conserve cash. This week, the world of ocean transportation saw significant dividend cuts at Teekay LNG Partners (TGP) and Teekay Offshore Partners (TOO).
Peter Evensen, president and CEO of both entities, discussing TGP said: “As a growing MLP, Teekay LNG does require capital and there is currently a dislocation in the capital markets relative to the stability of our businesses such that the partnership's cost of equity has increased to the point where it is currently not an economically attractive source of capital.”
Listed MLP structures are not prevalent in the workboat sector. One partnership, Martin Midstream Partners (MMLP), had 11% of its adjusted EBITDA, a measure of cash flow, coming from marine transportation in 2014. Even though MMLP does not have a massive capital investment program, it does face commodity price exposure (partly hedged) on prices of natural gas liquids, in a different division. Prices of MMLP partnership units have been battered throughout 2015, but its distributions continue.
