So far this year, the debt markets continue to be open to the midstream space, as many partnerships issue debt and call back bonds that were originally issued with significantly higher rates.
“After raising $16.6 billion last year through 27 term-debt offerings, the pace so far in 2011 is set to even exceed last year’s record,” predicts Darren Horowitz, analyst for Raymond James & Assoc.’s research group. “We believe activity may pick up in first-quarter 2011 as expectations for rising interest rates continue to grow.”
The equity markets were also fairly active and well received in the first quarter, with several bought deals leading the way. Yet, recent events could cast a pall over business as usual.
Along with interest rates, oil prices are expected to climb, based on supply disruptions caused by turmoil in the Middle East, Africa and the Asian region, but that trend could be short lived. With a still-shaky economic recovery under way, high transportation costs could slow down growth.
“Despite the demand boost from the disaster in Japan, the most likely scenario is that prices will drift downward over the coming year—noting that the risk of further supply shocks is likely to see prices remain volatile for some time,” says Joachim Azria, analyst with Credit Suisse Research and Analytics.
Meanwhile, gas prices continue to bounce along the bottom.
“Although it might seem surprising that U.S. producers would continue to drill in a $4-per-million-Btu price environment, we expect that a confluence of factors will likely prolong the current period of oversupply,” says Azria. “We still believe the relative stability in the total U.S. rig count, increased drilling efficiencies, and the possibility that the industry has built a sizable backlog of unconnected wells will lead to U.S. production gains next year.”
Some of the unconnected wells are also due to a lack of gathering lines, especially in the rich-gas plays where producers get a value boost from natural gas liquids.
Going forward in 2011, look for more joint ventures or even informal cooperation between producers and midstream companies as they work to get gathering lines in place. The markets can expect to see continued equity and debt issuances to support buildouts and asset transactions in the Northeast and Southwest.
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