Falling Oil Prices Good for Companies, Bad for Their Stock
It’s a good time to be in the logistics of the oil market. Companies that are in the business of transporting and housing oil and other refine products are seeing profits climb as the supply of crude oil all over the globe continues to be overabundant and prices are continuing to fall. Shipping terminals are also reporting back sky high profits recently, but on the opposite side, share prices are not fairing too well.
Petroleum logistics firms, also called midstream companies, are seeing more and more work thrown their direction as the surplus forces prices down towards multi-year lows. More oil means more business for companies that operate pipelines, tanker trucks, storage tanks and marine terminals.
Tesoro LP is an oil refiner and petroleum product maker with six refineries in the Western U.S. They are able to refine about 845,000 barrels per day for their almost 2,300 retail gas stations. They reported their second quarter income was $72 million, which is over twice what it was during the same time last year. It attributes the growth to oil production gains and a better environment for its terminal and transportation businesses.
Spectra Energy Partners, and owner/operator on pipelines and facilities for gathering, processing, transporting, storing and distributing natural gas, also reported above expected earnings. Arc Logistics Partners, who owns and operates terminalling, storage, transloading and pipeline assets, also turned in earnings greater than what analysts anticipated.
But these companies have seen their stocks suffer this year. Many of their stock are master limited partnerships, which is a system used by businesses to lower taxes and provide higher dividends. Tesoor has taken the greatest hit, with stocks down 15%. Spectra has fallen by 14% and Arc has lost the least, only down 1.4%. Since the beginning of the year, the Alerian MLP Index, which follows oil infrastructure companies, is down a little over 24%.
In general, it seems that investors are making the move away from oil-related stocks, causing midstream companies’ shares, like those above, to fall. “This industry is heavily retail-owned, and when investors see crude oil sell off, they think,’Oh, it’s energy, I need to sell it,’” said John Edwards, a Credit Suisse analyst.
Investors are also worried that lower oil prices means an eventual cut back by oil producers, causing another hit to midstream companies. Storing excess oil costs money and fees are increasing as tank all over the world are being filled to the brim. Brian Zarahn, a Barclays analyst explains “There’s concern that lower oil prices will eventually mean lower production, and lower utilization of the assets and fewer growth opportunities,” he said. “It’s a concern for the space as a whole because we’ve been through a very large buildout.”
Today, oil is about $44 dollars a barrel, compared to a norm on around $60 a barrel.