Everybody can exhale. The first quarter (1Q) is in the books and the midstream successfully navigated a perilous market landscape with aplomb.

That being said, the generally happy results from 1Q pretty much met expectations.

“So far, midstream seems to be pretty resilient in the face of the decline in oil prices and the slowing of production growth,” Bernie Colson, managing director of Oppenheimer & Co. Inc., told Midstream Business. “But the midstream takes all of its cues from E&P, so there’s going to be a lag between when the producers are impacted and the time it takes to make its way through to the midstream. It’s the first quarter, so it's not really surprising that you’re not seeing a lot of impact from this weaker environment.”

Not much impact yet, but there is still the matter of when the invoice from the piper will arrive.
“The lead times on a lot of these midstream projects are 12 to 24 months, so you can expect at least a year before you really see a lot of slowing in the rate of spending,” Colson said. “Keep in mind the capital budgets for 2015 for a lot of these companies are in process. Their projects are in various stages of construction. They
don’t just slam the brakes on those. Typically they have long-term contracts associated with them, and so you really need to get outside of that lead-time window to start seeing the impacts.
“I really don’t think you see an impact until late 2015 when the companies start providing guidance for 2016,” he said. On the M&A front, midstream stayed on course, its performance providing a stark contrast with the slowdown experienced in the upstream. PricewaterhouseCoopers LLP’s (PwC’s) 1Q M&A analysis counted 22 midstream deals totaling $29 billion in value, which registered a 47% increase in deal volume and a 398% growth in deal value compared to 1Q 2014.
“The continued demand for the build-out in the midstream space is really less affected by the decline in oil prices,” Doug Meier, PwC’s U.S. energy sector deals leader, told Midstream Business.“In the first quarter, MLP dropdowns and affiliated transactions were a significant component of those 22 transactions. That’s consistent with what we’ve seen in other quarters as well, although the absolute level of activity was a little bit higher in the first quarter. There was strong demand for assets, especially by MLPs, which had access to the capital markets and have been able to raise secondary offerings in the equity markets and were able to fund acquisitions, either from unrelated parties or affiliated transactions or dropdowns.”
Meier expects M&A to continue to be strong for the rest of 2015.
There is significant demand in the marketplace for assets across the midstream value spectrum from pipelines to storage and terminals,” he said. “We would expect the midstream space to be relatively less affected by the volatility in commodity prices and for M&A activities to remain robust.”
The PwC report also noted an over-all precipitous decline in megadeals, those transactions valued at more than $1 billion, most of which involve E&P companies.
“There were only four in the first quarter,” Meier said. “You had 42 over the last three quarters of last year, so you averaged 14 a quarter. And you had some very large transactions happening in the second half of last year. We saw three megadeals in the midstream space in the first quarter, but we saw a very significant decline in E&P deals.
“Clearly what we’re seeing in the numbers is smaller types of transactions,” he said. “When you look at it from a value perspective, I would say that there are opportunities in certain sectors for consolidation and consolidation plays, and one of the things we are looking out for is roll-up type activity in certain sectors of the space, which is smaller- to middle-market types of companies that are ripe for consolidation.”
Despite capex and workforce cuts on the E&P side, the industry attitude remains relatively upbeat.
“I think that people are generally fairly optimistic and keeping their fingers crossed that oil is going to bounce back up in short order,” Colson said.“It seems to me from the research I’ve seen on the E&P side that the producers’ stocks are still baking in a much-higher crude oil price. It seems like the industry is really crossing its fingers and hoping that this is a short-lived trough, like we’ve seen in the last several crude oil cycles, and not something that is going to prove to be more extended.”
Dealmakers are taking a more wary approach. “The mood is cautious,” Meier said. “People are looking at things from a very careful perspective and not wanting to be too aggressive or make too early of a move. Companies have really been focusing internally on what can they do. What are the short-term immediate actions that they can take to drive efficiencies, to reduce costs? There’s caution amid the uncertainty right now. From an M&A perspective, if you have capital, that presents potential opportunities.”

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