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Fitch: Pipelines Stable Despite Downturn

Despite a negative outlook for the U.S. economy in which a 1.2% decline in gross domestic product (GDP) is projected for 2009, Fitch Ratings sees relative stability ahead for natural gas pipelines.

Positive demand for natural gas and stable rate designs are to be credited for helping to counter the effects of the economic recession on pipelines. Less insulated are companies in the midstream sector, where lower average natural gas and natural gas liquids (NGL) prices will make for harder times, Fitch said.

On the bright side for the gas industry:

However:

Fitch noted that interstate and intrastate pipelines tend to enjoy stability through business cycles and have limited or manageable exposure to commodity prices. "However, even with these fundamental strengths, pipeline companies face increasing challenges through the remainder of the current infrastructure building cycle," Fitch analysts wrote in a Thursday research note. Costs are up and access to capital is down, and "the ability of pipeline companies to downsize expansion spending on larger projects during 2009 appears limited given the long lead times, contractual commitments under binding shipper arrangements and the pre-construction ordering of steel pipe and compressors."

On the gas storage front, project development will slow and only the best projects will move forward, Fitch said. "On the positive side, lower natural gas prices will lower the cost of pad gas needed to operate a storage facility," analysts said.

Now, at least, gas-fired power generation looks as if it will give support to gas demand.

"While a severe, long-term economic downturn would put downward pressure on drilling activity and commercial and industrial usage, increasing demand to service a growing electric load should more than compensate for potential declines," the analysts wrote. "However, it is important to note that should the economy worsen and electricity consumption contract, the sector's demand for natural gas could decline as large gas-fired plants are typically the last to be dispatched."

The number of rigs actively exploring for natural gas and oil continues to slow, with the U.S. rig count flat at 1,941 as of Friday after losing a record 51 rigs the week before. Canada operators laid down another 18 rigs last week, Baker Hughes Inc. reported Friday.

Most of the rigs lost are in Texas, which dropped to 885 on Friday from 922 in operation just three weeks ago. New Mexico's rig count also has taken a big hit this month, falling to 74 on Friday from 92. Louisiana, which lost 12 rigs two weeks ago, is at 192 rigs, and Oklahoma is down five rigs since the start of the month to 195. Canada, which began November with 445 rigs in operation, now has 400 in operation (see related story).

But the Fitch analysts point out that some drilling activity is protected "by the need to drill in order to protect leaseholds acquired at significant premiums to historical prices paid. Additionally, a recent buildout of infrastructure, particularly in the Rockies, is helping to release previously shut-in gas to the market, leading to better pricing for producers, even in today's commodity environment."

For 2009 Fitch is projecting a natural gas price deck of $7.25/Mcf under its base case and $5.50/Mcf under its "stress" case. For 2010 the corresponding projections are $6.50/Mcf and $5/Mcf. The long-term forecast calls for $6/Mcf under the base case and $4.50/Mcf under the stress case.

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