While the world collectively wrings its hands in angst over oil prices, layoffs and laid-down rigs, one sector of the energy industry has been relatively safe and snug in the middle of the value chain: the midstream.

But the midstream may, in fact, be in for a struggle.

Already, we’ve seen deflating commodity prices smack-down the upstream sector. The list of companies that have terminated workers reads like anyone’s top 10 list of oil and gas companies: Shell, Halliburton, BP, Schlumberger, Baker Hughes. It is both long and distinguished.

But until recently, it didn’t include any midstream names. The folks who move the stuff from the ground to the consumers had been protected by long-term, fee-based, take-or-pay contracts. No more.

Already, hundreds of workers have been dismissed from DCP Partners and Enable Midstream, and there could be more talent on the chopping block as continued oversupply means it’s not quite so imperative those millions of barrels of oil are raced to distant refineries.

I asked Hinds Howard—known by many as the brains behind the “MLP Guy” blog—and vice president and senior financial analyst for CBRE Clarion Securities, whether more midstream layoffs are on the horizon.

He answered that, frankly, since MLPs have enjoyed a long growth cycle, he doesn’t have much experience talking about midstream layoffs.

However, he explained, “The guys closer to the wellhead—people with large gathering and processing businesses where you’re laying the last small line of pipeline for the driller—may not need to lay as much pipe. And you may not need as many people to do that. And you also may be facing pressure in terms of financials, and so you may need to cut back to appease the market and get your distribution coverage in line.”

Following the lead of upstream companies that have revised downward their 2015 capital guidance, midstream companies such as ONEOK Partners are doing the same.

“They’re probably going to need fewer people to build processing facilities. I think hiring the construction people … [those looking for work] are going to be in trouble,” he said, adding, “A few months ago, we were talking about an employment crunch: Would we have enough people to build all these things that Cheniere [Energy Partners LP] wants to build, as well as these pipelines; we didn’t have enough labor. I don’t think that’s going to be a problem.”

The steps toward the slower cycle can be described as:
1) Producers cut their capital spending;
2) Midstream companies push off their capex; and
3) Employment dips.

“Then you’re going to see the reverse of that, which would be a long process in the other direction. And they may be gun-shy in terms of hiring all that back. We’re probably in for a little time of not-so-great times.”

Exactly how long the midstream pace may be slowed depends on commodity prices, he said.

However, the flux could be construed as healthy. The industry was on an unsustainable path of development in which companies worried about not having enough trained employees for all the work that needed to be completed.

“Now we’re going to push all that out and it’s going to be a slower, probably steadier and longer-term buildout of these things,” he said.

“I don’t think it’s doom-and-gloom. I think it’s just sort of bringing everybody down from really high growth assumptions—assumptions that you’re going to need to build out perpetually and that 120 MLPs would all be able to win. That’s just not reasonable or realistic, so I think a resetting is efficient,” he said.

The MLPs that make up the bulk of the midstream business model have to operate with capital discipline.

“They’ve got to pay out most of the cash flow they make, and they have to check with the market every time they want to spend money. You’ve got to have cash flow coming in whenever you spend money because you don’t have any extra cash flow usually,” he said. “They’re going to cut as many employees as they need to now, reset things, and 24 months from now, they’ll be either stagnant or growing their people.”

Deon Daugherty can be reached at ddaugherty@hartenergy.com or 713-260-1065.

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