Fitch: N. American Midstream Energy Stable amid Commodity Prices

NEW YORK--()--Both the rating and sector outlooks for the North American Midstream Energy sector are stable amid expectations for stronger commodity prices, improved access to capital markets and lower counterparty risk, according to Fitch Ratings. Balanced growth spending is expected to leave credit quality intact, while liquidity remains sufficient and debt maturities are manageable.

New pipeline projects will continue to come online in 2017, but the size and scale of capital spending is likely to be measured. Issuers may pursue the possibility of joint venturing or project financing large-scale projects. The overall prospects for pipelines should continue to be favorable and improve, given President-elect Donald Trump's support of energy infrastructure. Midstream services will continue to see lackluster processing volumes, while natural gas liquid prices will remain depressed.

Fitch expects fundamentals to remain healthy for natural gas, crude and refined products pipelines. We expect infrastructure and domestic energy development will be key areas of focus for the Trump administration. In particular, Fitch believes a more constructive federal regulatory approach toward pipeline construction will be a benefit for midstream energy issuers, both from an operating and a financial perspective.

Delays and denials in the federal permitting process have introduced regulatory uncertainty surrounding the willingness of the Obama administration to issue federal approvals needed to build energy infrastructure. Rising public protests and state regulatory opposition remain risks.

However, uncertainties around Trump's promised repeal of the North American Free Trade Agreement and how that will affect the importing and exporting of hydrocarbons to and from Canada and Mexico could have negative financial implications for midstream energy names. Further uncertainties around multiple IRS master limited partnership (MLP) tax rules and practices could resolve favorably for MLPs under the new administration.

We believe midstream services may once again be challenged, largely due to processing. Fitch expects processing volumes to remain lackluster as production budget cuts continue to work their way through challenged basins and ethane rejection remains an economic choice for producers. With new ethane cracking capacity scheduled to be in service in late 2017 and into 2018, Fitch expects demand and pricing to improve, but not until the end of 2017, leaving most of the upcoming year challenged.

In addition, we anticipate continued mergers and acquisitions (M&A) in 2017 following an active 2016. Fitch expects to see transactions continue, particularly those financed with equity exchanges, despite the high cost of capital for many issuers. Fitch forecasts M&A activity in the near to intermediate term that focuses on opportunistic asset acquisition by larger midstream issuers and small- to midsized issuers focused on scaling up, particularly as large historical organic growth opportunities moderate. We expect M&A impact on the sector will likely be neutral, provided issuers lean on equity funding to maintain manageable leverage.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Related Research

2017 Outlook: North American Midstream Energy (Sector Stabilizing)

https://www.fitchratings.com/site/re/890929

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Contacts

Fitch Ratings
Kathleen Connelly
Director
US Corporates - Midstream Energy
+1 212-908-0290
Fitch Ratings
33 Whitehall Street
New York, NY
or
Kellie Geressy-Nilsen
Fitch Wire
+1 212-908-9123
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Kathleen Connelly
Director
US Corporates - Midstream Energy
+1 212-908-0290
Fitch Ratings
33 Whitehall Street
New York, NY
or
Kellie Geressy-Nilsen
Fitch Wire
+1 212-908-9123
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com