Midstream

Rance Long

BD - Midstream Sector & Gas Distribution

midstream@mrcglobalinsight.com

Representing broader energy sector activities from the well to the refinery or end-user, the US midstream market appears to be poised for continued growth in 2014. The fundamentals for growth for US midstream companies are in the infrastructure requirements driven by the demand for oil, natural gas and natural gas derivatives. Throughout the country, several projects are in the early stages of construction while many more are entering the advanced planning phase. These projects are expected to deliver the much needed infrastructure to eliminate bottlenecks in the prolific shale plays. This large-scale build-out is likely to put a spotlight on the midstream sector for several years.

Energy commodity pricing, fueled by current economics, is expected to enhance an already optimistic midstream market for 2014. Impacted by a severely cold winter, most North American natural gas storage inventories have been reduced by more than 40% year over year1. Spot natural gas prices in the US are now projected to average $4.60/mmbtu in 2014, an increase of 26% from last year. Additionally, oil prices (WTI) have risen in the calendar Q1 2014, to over $100/bbl, with expectations to stabilize at $90/bbl, in the second half of the year. Although average 2014 oil price estimates are down slightly from 2013, amounts should remain favorable enough to encourage increased market activity.

Line pipe, a primary commodity in midstream spending, has experienced deflationary pricing pressures during 2012 and 2013, but future outlook indicates a shifting dynamic. The growing expectation is that line pipe pricing will increase moderately with demand as the year progresses. Delivery times, generally speaking, should remain consistent with manufacturer lead times in the relative 8 to 12 week range. However, large diameter ERW deliveries are experiencing some extensions as an increasing number of large infrastructure projects enter the procurement stage.

The requirement for valve commodities is also expected to increase moderately in the first half of 2014. MRC Global is expecting valve pricing to remain fairly stable, with some moderate increases as the year progresses. Similar to large diameter line pipe, valve deliveries are expected to extend as large projects begin to fill manufacturers' backlogs. While inventory levels are strong and expected to satisfy a majority of requests, the general expectation for increased demand could foster greater lead times for valves, line pipe and most other midstream product lines.

An emerging trend toward organic growth has taken the place of the expansion by acquisition in the US midstream market. Due to high multiple costs of acquisitions, many midstream companies are focusing on the organic growth fostered by capital expenditures in building infrastructure. This trend is evident by the mounting number of approved and proposed large midstream projects that are currently in the planning stages. New midstream infrastructure spend in the Marcellus, Utica, Permian and Bakken basins are likely to see increasing focus as new projects come on-line. We anticipate continued strong activity in the Eagle Ford, Mississippian, Barnett and Niobrara shales in addition to new areas like the Monterey Shale in California. As the midstream market continues to realize the build-out of shale play infrastructures, coupled with the development of new shale plays, the overall sector is anticipated to see increasing growth and activity throughout 2014 and well into the future.

1Spears & Associates, "Drilling and Production Outlook," March 2014.

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