North American oil and gas midstream companies face a $123 billion “avalanche” of debt maturing over the next four years, but firms should continue to have access to capital as near-term refunding needs are seen as “manageable,” according to Moody’s Investors Service.
In a report issued Tuesday, credit ratings analysts said roughly 54% of the aggregate midstream total comes due during 2023-24, easing near-term refinancing stress on the sector as long as capital markets access remains open to energy companies. However, the sector’s need to raise incremental debt is “ebbing” anyway as growth opportunities slow and fewer mega-projects are chased in the near term.
“Much of the midstream sector has refocused on improving balance sheets, attempting to reduce leverage, choosing new spending initiatives more selectively and retaining higher percentages of cash, all in an attempt to limit external financing needs,” said the Moody’s team, led by Andrew Brooks.
In addition, companies also have made their organizational and financial structures “less opaque” in recent years as they try to broaden their appeal to a wider investor base, the analysts said.
Investment-grade debt makes up 67% of the $123 billion total, with the top six most exposed North American midstream companies facing $67 billion of debt maturities coming due by 2024, or 55% of the entire amount due for the sector.
Enbridge Inc. represents the largest bloc, with $20 billion in scheduled maturities through 2024, according to Moody’s. However, Enbridge also has reduced its debt levels in recent years, “selling assets to help finance some acquisitions and large spending programs, as well as engineering a simplification of its organizational structure.”
In “highlighting the strength” of Enbridge’s balance sheet, management last month said the company closed on three noncore asset sales that garnered more than $8 billion in proceeds, above its original asset sales target.
“We will be disciplined by investing in low capital intensity organic projects and living within the equity self-funded model,” said Enbridge CEO Al Monaco on a call to discuss fourth quarter earnings. “And, of course, the balance sheet and financial flexibility will continue to be the overarching priority.”
Energy Transfer Operating LP, the principal operating subsidiary of Energy Transfer LP, has $13.5 billion in debt maturing during 2020-24, according to Moody’s. Both companies are asset rich, and asset sales and joint venture investments “offer ample sources of alternative liquidity,” analysts said.
“Large, diversified midstream companies such as these also have strong banking relationships, should debt capital markets become less accommodating.”
Speculative-grade debt maturing during 2020-24 totals about $41 billion, representing 33% of all midstream maturities during that period, according to Moody’s. While most of that debt is due starting in 2023, speculative-grade companies who tend to have shorter debt maturity profiles generally would need to refinance more of their debt in the next five years, the analysts said.
However, “midstream investors are increasingly focusing on longer-term refinancing prospects under the assumption of prolonged weakness” in the sector’s exploration and production (E&P) customer base. The energy sector has performed poorly since 2009, Moody’s said, and although mostly concentrated in the E&P and oilfield services sectors, “debt investors have suffered considerable losses” through bankruptcies and distressed exchanges following the 2014-2015 oil price crash.
“While midstream investors have experienced comparatively fewer losses, returns have badly underperformed those of broader market indices,” the Moody’s team said. “Midstream lenders continue to make credit available, and an inevitable slowdown in midstream spending amid weaker upstream conditions would not necessarily hurt midstream credit quality.”
Deterioration in counterparty credit, however, heightens credit risk, particularly for speculative-grade midstream companies with single-basin exposures and limited product and service lines, according to the analysts. In this case, lenders would likely seek higher risk premiums as compensation for their exposure to midstream companies’ elevated commodity-price and volumetric risk; uncertainty around future cash flow; and growing public and governmental efforts globally to limit the extraction, processing, transportation and use of fossil fuels.
Among the 43 speculative-grade midstream companies Moody’s rated, Plains All American Pipeline LP had the single-largest burden, with $3.7 billion due through 2024, followed by Blackstone CQP Holdco LP and Buckeye Partners LP.