The North American midstream energy sector has a positive outlook over the next 12-18 months based on an expectation that fundamental credit conditions in the industry will improve, Moody's Investors Service analysts said Thursday.
"A groundswell of activity in unconventional natural gas plays has given U.S. gas production its strongest growth patterns in about 30 years," said senior analyst Francis Messina. In addition, "strong oil prices are leading producers to concentrate on the production of oil and natural gas liquids [NGL], whose prices closely relate to oil."
The number of oil rigs operating onshore in the United States has doubled over the past year, and now accounts for 40% of drilling activity -- the highest contribution in 12 years, noted Moody's.
"The offshore drilling moratorium in the Gulf of Mexico following the Macondo oil disaster has pushed producers toward onshore plays, increasing the volumes that must be processed, fractionated and transported -- all functions handled by midstream companies.
"This combination of factors such as the development of shale gas plays, the increase in oil and NGL production, and the big onshore drilling surge, will compel the increasingly competitive midstream sector to build more infrastructure," Messina said.
However, the analysis found that more money needs to be spent on midstream infrastructure, which means some companies require more access to the capital markets, Messina added.
However, for master limited partnerships (MLP), which dominate the midstream sector, "a trend away from incentive distribution rights [IDR] should reduce the cost of capital for funding new infrastructure projects," he said.
In recent weeks several MLPs have streamlined their operations by combining with their general partners, effectively canceling the IDRs. Buckeye Partners LP and Buckeye GP Holdings LP in June agreed to merge, and in August Inergy LP and Inergy Holdings LP said they would combine their partnerships. In early September Enterprise Products Partners LP combined its holding companies (see Daily GPI, Sept. 8). And last week Penn Virginia Resource Partners LP agreed to buy general partner Penn Virginia GP Holdings LP (see Daily GPI, Sept. 22).
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