Pipeline Industry Faces Possible Adversity After Drop in Stocks

Pipeline Industry Faces Possible Adversity after Drop in Stocks

A recent decline in the stocks of three major American energy companies has caused their recent actions to be under intensive scrutiny. Chesapeake Energy Corp., Williams Cos., and Energy Transfer Equity LP were the top three energy companies in America to suffer a noticeable drop in share price. Possible signs of failure in a specific industry has a major impact on all of their business partners and others who rely on their service. Saying that investors are starting to get worried would be an understatement. Despite the signs of the energy industry potentially self-destructing, all three of the most affected companies stated that they have no intentions on filing for bankruptcy.

To fully grasp where this sudden fall in share price originated, we must take note of all the events leading up to this. Market research shows that this negative trend in stock could possibly be associated to a rumor that pertained to Chesapeake Corp. consulting with bankruptcy advisors. Such rumor could easily trigger panic and a sudden urge to pull out from that market.  That appears to be the case in this predicament, yet it is only one piece of the puzzle. Whenever you provide a physical service, you have to establish a way to transport your product to your customers, or a second hand merchant. In terms of energy, they primary method of transportation is via pipelines. Now there is another key player/factor being thrown into the equation, the provider.

Companies must initiate the purchasing process (page 69) of choosing a provider to distribute your product. Chesapeake Corp. chose Williams Co.as their pipeline provider, and their current contract obligates Chesapeake to pay 1/5th of all the revenue they generate from the access to Williams Co.’s pipelines. The issue with this is that this 20% premium is to be paid regardless of if the pipelines are being used or not. This alone draws a red flag in my mind, the possibility of defaulting on that premium could easily be increased by any shake up in the market, leaving Williams Co. (or any other company purchasing access to pipelines) with a hefty tab regardless of how much they actually utilized the pipelines they are paying to use. When we bring it back into perspective of the current plummet in stocks, Chesapeake Co.’s financial woes rolls over to Williams Co. because not as much revenue is being generated. The domino effect does not stop there; Energy Transfer Equity LP has been attempting to facilitate a merger partnership with Williams Co. for some time now. It would not be a lucrative idea to enter a locked business deal with a chain of companies that is suffering economic drought. Ever since the announcement of this merger, Williams Co. has experienced a 73% loss in shares.