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Slower projected growth in global midstream’s EBITDA has prompted Moody’s Investors Service to downgrade its outlook for the sector to “stable” from “positive,” where it has been since September 2010.
The New York City-based bond rating service attributes midstream’s less-than-sunny outlook for the next 12 to 18 months to deep cuts in capital spending and slowing production in the E&P sector. These reductions have flowed down to midstream, forcing the sector to trim its own spending on growth projects, which had been driving its strong EBITDA results.
Moody’s bleak forecast for oil and gas prices adds to its concerns over already squeezed processing margins.
“While G&P [gathering and processing] volumes have remained intact across many producing basins, weak commodity prices pose a substantial risk to G&P profitability through at least late 2016, straining distribution coverage and raising leverage,” Moody’s analysts wrote in their report. “Throughput volume declines in NGLs and crude oil, and in mature natural gas basins, cannot be ruled out, and would lead to further pressure on G&P-originated EBITDA.”
The report acknowledges the groundswell of M&A activity in the sector in the face of diminished organic growth opportunities, but the analysts are skeptical that this trend will move the midstream needle. “These synergies and savings would not come close to the scale of EBITDA growth that the construction and service of new assets have provided,” Moody’s said.
The issue of financing comes into play as well, with falling equity prices raising the cost of capital. Midstream’s dominant MLP model comes under scrutiny because of the need to continually provide higher distributions. Moving away from MLPs, Moody’s argues, would reduce pressure to increase distributions through continuing EBITDA growth.
A further change—to a “negative” outlook—is possible but unlikely, the analysts said, although the sector could be saddled with a prolonged “stable” label. Infrastructure and logistics are not entirely immune from commodity price risk and the prognosis for a rapid recovery in crude oil and natural gas prices is poor. A rebound in midstream, the analysts said, would require a recovery in upstream capital spending, and a positive impact from that would take several quarters before it had an effect.
Joseph Markman can be reached at jmarkman@hartenergy.com.
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