The outlook for pipeline equities in 2016 is hazy at best. Needless to say, extrapolating current trends doesn’t paint a pretty picture.

A Few More Distribution Cuts

At current yields, many of the midstream infrastructure providers cannot raise the equity they need to finance the expansion projects to which they have committed. Some won’t be able to plug this funding shortfall with additional debt and asset sales.

For those, a distribution cut like the one announced by Kinder Morgan (NYSE: KMI) last month will loom as the least bad option.

Note that such cuts will not be dictated by the midstream cash flows, which should remain quite stable for most providers. Rather, they will be necessitated by financing gaps for essential growth projects.

How many will we see in the midstream sector, as distinct from the upstream oil and gas producers? I expect only a few most leveraged and heavily discounted master limited partnerships to take this drastic step. Among the giants, Williams Partners (NYSE: WPZ) seems most at risk, now that Plains All American (NYSE: PAA) has bridged its funding gap with a private placement of preferred units.

Most MLPs will opt instead to ramp up the debt, as Oneok Partners (NYSE: OKS) has just done by means of a new and relatively low-cost $1 billion loan.   

Refiners, Penny Pinchers to Drive Mergers

There will be more mergers too, both of the intramural distribution-shaving variety pioneered by Kinder Morgan in 2014 and empire-building ones like the pending buyout of Williams (NYSE: WMB) by Energy Transfer Equity (NYSE: ETE).

The reigning energy empires haven’t fared well over the last year with the notable exception of Magellan Midstream Partners (NYSE: MMP), whose management is probably too conservative to play the merger game.

That leaves refiners and their logistics affiliates as the likeliest industry consolidators, with Marathon Petroleum (NYSE: MPC) and Western Refining (NYSE: WNR) having already deployed some of their recent windfalls in this fashion. Phillips 66 Partners (NYSE: PSXP) and Valero Logistics Partners (NYSE: VLP) also seem like logical acquirers of midstream assets with their expensive equity.

A Change in Market Weather

So far all of the predictions for 2016 suggest it will look a lot like 2015. But in one key respect that simply cannot be the case.

In many ways not fully reflected in the total return, the midstream sector crashed harder last year than it did in 2008. Energy prices collapsed relatively quickly that fall, and by the following spring the recovery had already begun. The current slump is already more prolonged with an end not quite in sight, and it’s pushed MLP yields, and therefore the cost of new equity capital, to record highs.

In a reflection of investor sentiment that has never been worse, MLP yields simply no longer matter to potential buyers. Getting here from the relative optimism that prevailed as recently as six months ago is what created this crash. From here, investor sentiment can only improve, which is what it’s likely to do this year, albeit with plenty of volatility along the way.

As global energy markets tighten in response to low commodity prices over the next year, this looming sentiment change should also push midstream equities significantly higher.

I’m going to go way out on a limb and guess that by the end of 2016 sentiment and MLP prices will be no worse than they were last Nov. 1, when crude still fetched the lordly sum of $46 a barrel. And if the Alerian merely gets back to where it was back then, it will have gained 37% from current levels and 15% for the year, before dividends.

I think it will do better than that, and there are any number of fundamental reasons for such optimism. It’s admittedly hard to see that happening given the markets’ current state, but markets seldom fail to surprise.