Usually, just a little business gets done during December. In amongst the revels for Christmas, Hanukkah, Kwanzaa, Festivus, etc., the business transacted typically has something to do with that new year that looms just ahead. Capex, business trends, economic conditions and such are the office topics these days.
So with 2016 right out there, it may be pertinent to look at what some of the industry’s analysts and observers see. But as always, keep in mind the warning of philosopher (and baseball legend) Yogi Berra that “It’s tough to make predictions, especially about the future.”
Ethan Bellamy at Baird Energy Research did a “Reading the Tea Leaves” segment in a recent research report, trying to make sense of the mixed messages posted by third-quarter and nine-month earnings, commodity prices and stock market zigs and zags as the fourth quarter progressed.
“This mixed trading backdrop underscores investors’ unease as the industry turns attention toward 2016’s outlook,” Bellamy said. In other words, there are multiple arrows, pointing in multiple directions. The confusing projections probably come from a varying focus by differing observations on a particular sector of the business. The old story of the blind men attempting to describe an elephant comes to mind—and the energy business is one big elephant.
Upstream, projections are gloomy. Wells Fargo Securities noted an ever-so-slight uptick in 2016 hedges, “… but nothing significant. Why? Two reasons in our opinion. First, we think it’s mentally difficult for management teams to lock in $45 per barrel crude when majority of inventory doesn’t work at those levels. And second, management teams seem to have an inherent belief that crude prices have to move higher ‘because.’”
Here in the middle of the business, things look better, according to Wells Fargo.
“Notwithstanding our near-term outlook, we continue to view most midstream MLP distributions as secure even in this environment,” the firm said in an MLP review. “We believe sentiment will improve once crude oil prices stabilize at a level that is economic in which for U.S. producers to drill and grow profitably. This should lead to a clearer trajectory for volumes. We view the infrastructure thesis as largely intact, at least for the next two to three years, which should support an attractive industry distribution growth rate. We forecast 2015-18E organic capital spending of $128.5 billion and a three-year distribution compound annual growth rate for the sector of 6.4%.
“Consequently, while it’s difficult to predict when the tide will turn, we do view the current weakness as a good entry point for long-term investors. We would be positioned in high-quality, large-cap fee-based names … which tend to be the first category to outperform in a recovery,” the report added.
Downstream, things have seldom looked brighter. There may be a lot of whistling these days around the hydrotreaters and alkylation units. Greg Garland, Phillips 66 Co. CEO, no doubt took pride in telling investors third-quarter 2015 “represents a second-best earnings quarter since our formation” in the refiner/marketer’s earnings call. Several analysts project strong refining margins will continue well into the new year.
So what should we do? One wag at Hart Energy’s Midstream Texas conference observed that “there are always forecasts and they are always wrong.” Yogi Berra also once said “You can observe a lot just by watching.” Maybe the best course is to watch for a while longer and enjoy the annual break in the action December offers.
Meanwhile, please remember our first Midstream Business Excellence Awards. There are three categories:
• Executive Of The Year—The premier award that will recognize the most impactful, innovative and inspirational midstream executive for 2015.
• Deal Of The Year—There have been some big M&A moves this year, which was the best? We’re looking for innovative structures or excellent execution.
• Project Of The Year—A number of criteria will be considered in this category. Execution and management will be top considerations. Nominations must be for significant, strategic infrastructure. That could include gathering, processing (including LNG projects), transportation or storage ventures.
Entries may be submitted at www.midstreambusiness.com/excellence-awards. Deadline is Feb. 1, 2016, and winners will be announced at the 2016 Energy Capital Conference, sponsored by Hart Energy.

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