Chesapeake woes cast shadow on pipeline companies in US

US oil and gas pipeline companies including Williams Companies and Kinder Morgan have contracts worth billions of dollars that might be at risk as Chesapeake Energy Corp aims to slash its debts amid collapsing energy prices.
Chesapeake said on Monday it had no plans to file for bankruptcy after sources told Reuters the firm, whose debt is eight times its market value, had asked its longtime counsel to look at restructuring options.
The way it deals with its financial woes could be a lifeline or death sentence for midstream pipeline companies. Often called the energy market’s “toll takers,” they have long-term contracts with producers such as Chesapeake to move, process and store energy products, experts said. Many of these companies are master-limited partnerships, or MLPs.
Chesapeake said it has commitments to pay about $2bn a year for space on pipelines run by MLPs, federal filings show.
During the US shale boom, investors flocked to MLPs, which were growing as much as 8% a year.
But investors have fled in droves out of fear that the companies will not maintain their hefty dividend-style distributions.
But with oil prices at their lowest in 12 years due to a global supply glut with Opec unwilling to slow production, profits at energy companies have plummeted and analysts do not expect any significant price recovery until at least 2017.
Williams has the most exposure to Chesapeake after buying Chesapeake’s logistics assets for $6bn in 2014, Jay Hatfield, portfolio manager of New York-based InfraCap, said.
Williams did not respond to requests for comment.
Other companies with contracts include Spectra Energy Partners, Columbia Pipeline Partners and Marathon Petroleum Corp’s unit MPLX, according to SEC filings.
These long-term contracts, often referred to as minimum volume commitments, were supposed to protect MLPs from major oil and gas price drops, because they include so-called minimum volume commitments, where customers pay pipeline operators whether they move any oil or not.
But the latest leg down in crude’s 19-month plunge has cast doubt over the perceived safety of those contracts as producers try to navigate the oil crisis.
Experts said they expect Chesapeake will try to renegotiate contract terms, which would be the first major test of these deals and the so-called midstream companies that flourished during the US shale boom.
Another risk is it could file for bankruptcy protection, which could give it the option discontinuing or renegotiating commercial contracts.
Hatfield said he expects Williams will be forced to accept a 50% price cut in its contract price with Chesapeake, either through the courts or mutual renegotiation.
That translates to a drop of about $300mn in annual cash flow for the $4bn company.
“It’s not good, but it’s not the end of the world,” Hatfield said.
In a note issued on Monday, Credit Suisse said the loss of its minimum volume commitments with Chesapeake would likely wipe out most of Williams’ cash flows. It said the losses could be up to $400mn.
Its shares plunged 35% to $11.16 on Monday on the Chesapeake news along with a management change at its bidder, Energy Transfer Equity.
“Certainly on the midstream side, everyone realizes that midstream isn’t bulletproof,” Doug Getten, a partner in the Securities and Capital Markets practice at Paul Hastings in Houston, said.
A Spectra spokesman said its Chesapeake contract to supply gas out of the Marcellus region accounted for less than 3% of its 2015 revenues.
Kinder Morgan, which scraped the MLP model in 2014 but still remains an industry bellwether, did not disclose its exposure to Chesapeake, but a spokesman said the company continues to closely monitor its counterparty credit risk.
Columbia Pipeline said it would respond to these questions in an upcoming investor call. Marathon’s logistics arm did not reply to requests for comment.