Q: Why do pipelines often weaken when the price of crude falls based upon high available supply ? Are their tolls tied to the price of crude ? I always thought the income was based upon the volume of oil moved vs the price of crude. Thank you.
5i Research Answer:
The pipes are certainly more tied to volume rather than prices. However, price can still impact the stocks of the group in two ways. First, investors group 'energy' as one sector, and if oil prices drop the pipes get caught in the same negative sentiment. But there is also a (delayed) real impact. If oil prices stay low for some time, then producers will cut back on drilling/production, and this can eventually impact volumes. And with less cash flow, producing companies have less ability to pay more for throughput, so earnings growth of pipeline companies via price increases can be impacted. Finally, if things get really bad, some investors will fret about receivables not being paid (i.e. if a producing customer goes bankrupt).