The U.S. economy will continue to improve this year—although that trend may remain more sluggish than most people would like following the 2008-2009 recession.
Nora Pickens, associate director for midstream energy at Standard & Poor’s (S&P), told attendees at the firm’s recent Midstream Energy and MLP briefing in Houston that the nation’s real gross domestic product will grow an estimated 2.8% this year.
“We’re still on the path to a full recovery,” she added in her presentation. S&P projects the unemployment rate will decline to around 7% in 2014 while consumer spending rises 2.8%. Residential construction is estimated to tick up 5.1% in 2014 from a very sluggish 2013.
Looking at S&P’s core rating business, Pickens said the slowly improving U.S. economy has had a positive impact on worldwide global bond issuances with the composite spread between rating categories narrowing in the second half of 2013. That narrowing of bond interest rates mirrors a comparatively low default rate for U.S. speculative-grade debt. Through three quarters, the spec-grade default rate stood at around 2.4%, down from 3% at year-end 2012 and below a base forecast rate of 3.1%. In comparison, the speculative-grade default rate went to 11% at the end of the recession.
S&P had tracked $2.47 trillion in new bond issues, globally, through the first three quarters of last year.
So what do these economic trends mean to the energy industry in general—and the midstream in particular? Pickens discussed positive and negative trends for the midstream going into the new year.
Going into the fourth quarter, S&P rated 8% of midstream debt it covered as A, 51% at BBB, 18% BB and 24% in the B category. Upgrades outpaced downgrades for midstream firms through the first nine months of the year.
On the plus side for midstream trends, crude oil prices remain comparatively high, there are multiple opportunities for cashflow growth from organic infrastructure projects and liquidity and capital markets remain favorable to the midstream, she said. Negative trends include lingering low prices for both natural gas and natural gas liquids.
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