With the end of the year rapidly approaching, we begin to focus on what to expect in the year 2020. The Bureau of Labor Statistics reported an increase in the construction industry’s jobless rate. It rose to 4 percent at the end of the third quarter, despite a gain of 10,000 jobs.
Anirban Basu, Associated Builders and Contractors’ chief economist, says the nonresidential construction sector added jobs during the third quarter, but the segments most closely tied to commercial construction, including retail and lodging, has slowed substantially.
He notes that the U.S. Commerce Department’s October report on third-quarter gross domestic product showed a 15 percent decline in spending on structures, at a seasonally adjusted annual rate. “A rather substantial dip,” Basu adds.
The construction market is cyclical in nature; however, the recent growth cycle is in its 10th year. There is a growing sense that a downturn is in the offing; it can be seen in the latest results of the ENR Construction Industry Confidence survey.
Most of the executives surveyed believe we are in the later phases of the growth cycle. A large percentage surveyed believe the market will begin to shrink in the next 12 to 18 months. Others believe the contraction has already begun. However, most of the executives surveyed say the market will see a soft landing and not a crash as experienced in 2008.
The biggest uncertainty is the impact of the 2020 presidential election. This coming election is specifically unsettling due to the business-friendly policy making of the Trump administration and the Democratic challengers who are diametrically opposite.
The industry is not panicking. Of the executives in the survey, 45 percent of the respondents stated that their firm’s profit margins are up from the past year, compared to 38 percent from the last quarter. During recessionary periods, contractors often bid little or no margin to maintain a backlog. This is not the case now.
Also, IHS Markit, a London-based global information service, is forecasting a significant slowdown of U.S. oil production growth. According to the report, total U.S. production growth is to be 440,000 bbl in 2020 before flattening out in 2021. Modest growth is expected to resume in 2022.
The critical challenge for our producers is to meet investors’ new focus on return on capital. This comes when facing a prolonged period of lower prices along with difficult access to financing from capital markets. The combination of closed capital markets and weak prices are extracting cash out of the system.
IHS Markit forecasts capital spending to fall to $90 billion in 2020 from $102 billion in 2019 and again in 2021 to $83 billion. Operators were able to outperform the price collapse in 2015-2016 because they were capable of outspending cash flow, thanks to accessibly to debt and equity markets. This time, however, capital markets are wary and the outlook for further productivity gains is limited.
The industry, however, can still grow rapidly under the right conditions. IHS Markit’s analysis indicates that a $65/bbl oil price would provide the ability to post strong growth while providing meaningful returns on investment. A critical tipping point for the new shale era appears to be oil prices ranging in the near mid-$50s. This is the point where it is viable to have both growth and shareholder return on investment.
Oil and Gas Expansion Plans
Marathon remains on schedule to conduct a plant-wide maintenance turnaround in early January 2020 at the Wilmington California refinery, a 103,500 bbl/day facility. The units include the Lone Crude and the 41,000 bbl/day Delayed Coker.
Williams Cos. reported that the U.S. Federal Energy Regulatory Commission issued a certificate of public convenience and necessity authoring the Southeastern Trail expansion designed to serve Transco natural gas pipeline markets in the Mid-Atlantic and Southeastern United States in time for the 2020/2021 heating season. This project will provide delivery capacity to utility and local distribution companies in Virginia, North Carolina, South Carolina and Georgia.
Plains All American Pipeline is continuing to expand its takeaway capacity in the Permian Basin. It is expected to begin construction before year-end on the “Wink-to-Webster” crude pipeline that will move crude from the Permian to the Texas Gulf Coast. The pipeline is expected to transport 1 billion bbl/day.
Plains also is making progress on expansions to two crude oil pipelines originating in Oklahoma. Both projects are planned to begin early in 2020. The Red River Pipeline extends from Cushing, Okla., to Longview, Texas. Plains is expanding the capacity from 150,000 bbl/day to 235,000 bbl/day by adding additional pumping capacity. Plains plans on completing this project by mid-2020.
Plains Chief Executive Officer Willie Chang indicates that Plain’s capital investments may be peaking. “Looking forward, we expect meaningful reductions in our capital growth program in 2021 and beyond as we prioritize lowering our leverage and returning capital to investors,” he says in a recent press release.
Toby Rice, the new CEO of EQT Corp., is reducing his company’s planned capex for 2020 by $500 million. “We plan to spend between $1.3 billion to $1.4 billion of capital to execute a disciplined program that will result in sales volumes roughly flat to the expected 2019 levels,” he states, adding that 65 percent of EQT’s capital will be deployed to Pennsylvania, 19 percent to Ohio and the remaining 16 percent to West Virginia.
Energy Transfer (ET) is investing heavily to expand while U.S. production of oil, natural gas and natural gas liquids (NGL) increases and requires takeaway capacity and processing facilities. ET’s capex for 2019 is $4 billion; it expects the same in 2020.
ET also is positioning itself to acquire SemGroup Corp. in a $5 billion deal. SemGroup is a midstream company expected to provide increased connectivity for ET’s crude and NGL transportation business. A shareholder meeting was scheduled for Dec. 4. The company expects the transaction to move forward quickly, predicated on receiving an affirmative vote.
Unfair Competition Lawsuit
Another significant development affecting the PVF industry is the verdict in the false advertising and unfair competition lawsuit against Ulma, Forja S. Coop and Ulma Piping USA Corp. On Sept. 27, after a nine-day trial in the U.S. District Court in Houston, the jury handed a win to Weldbend Corp. and Boltex Mfg. Co.
The dispute began in May 2017 when plaintiffs Weldbend and Boltex alleged that Ulma falsely advertised its carbon-steel flanges as heat-treated (normalized) in accordance with ASTM A105N specifications when they were not.
These parts are used in the construction of oil and gas pipelines, refineries and other vital applications.
The industry needs to increase the scrutiny of manufacturers supplying critical materials to their facilities. This applies to the end-user, the distributor and the fabricator to ensure the quality of the product and the safety of the U.S. pipeline operators and the American public.
PVF Roundtable News
The first PVF Roundtable networking event of the new year is scheduled for Feb. 11, 2020, at the Bell Tower on 34th in Houston, beginning at 4:30 p.m.
The board members urge you and your associates to attend the networking meetings. It is where the movers and decision-makers from all sectors of the PVF industry meet to exchange information, ideas and develop new relationships.