In the aftermath of Hurricane Harvey, our thoughts are with all of those affected by the flooding in Texas and parts of Louisiana. With the Gulf Coast accounting for such a significant component of the U.S. energy picture, a storm of this magnitude will clearly have ramifications for energy companies operating there. The storm damaged a substantial amount of infrastructure in the area, including in Houston, Beaumont, and Port Arthur, where a large portion of the U.S. refining complex and other major energy infrastructure resides. Though it's too early to determine what effects any damage will have on borrowers' credit quality, S&P Global Ratings believes it's possible there could be rating actions on some companies. Here, we respond to the questions investors have been asking us.
Just how important is the Gulf area to the U.S. refining industry and does S&P Global Ratings have any estimates on what the impact will be?
There is no question that the Gulf is the hub of the U.S. energy industry. To put this in perspective, of the total U.S. refining capacity of 18.5 million barrels per day (mmbbl/d), the Gulf coast area, or what is known as the Petroleum Administration for Defense District (PADD) 3, accounts for approximately 45% of the nation's petroleum refining capacity, as well as 51% of U.S. natural-gas processing plant capacity. We believe that about 3 million barrels have been fully shut down, representing 16% of total U.S. capacity and that another 1 million or so is temporarily shut down. This accounts for 21% of total U.S. refining capacity that has been shut in at this point and approximately 40% of PADD 3 refining capacity. Port Arthur represents particular peril, due to the significant flooding that has occurred there. Port Author is home to seven refineries with approximately 2.2 million barrels of capacity.
It's not just energy that is at risk, but the Gulf area is also a major hub for the petrochemical industry. Indeed, preliminary assessments put the share of U.S. ethylene production and consumption capacity that is offline at 41% and 33%, respectively. Many of the issuers we follow have operations in the Gulf Coast region and could be subject to operational and supply-chain disruptions as well as price increases in feedstock.
Does S&P Global Ratings expect to downgrade or revise outlooks on companies with operations in the area?
Given the fluidity of the situation, it's still too early to tell just how extensive the damage is and whether there will be downgrades or negative outlook revisions. It's not just the flooding of refineries or damage to equipment and oil- and gas-producing fields that pose major dilemmas, but the impairment and/or destruction to surrounding infrastructure such as port facilities, pipelines, electrical power, and labor availability that could keep capacity off line for a prolonged period. We will continue to monitor and surveil the situation and take appropriate rating actions when necessary.
Does S&P Global Ratings think there is a significant risk to its ratings on refineries?
We believe of all the energy subsectors, refineries will likely bear the brunt of this storm. Based on the initial reports we've received from the companies we rate, most capacity in the affected areas has been or continues to be shut down or operating at very low utilization levels. By our estimates, approximately 21% of total U.S. refining capacity (4 mmbbl/d) was impaired by storm-related outages. However, many of the refiners we rate--such as Marathon Petroleum Corp., Phillips 66, and Valero Energy Corp.--are well diversified, with only a portion of their capacity in Harvey's path. Refining assets that are outside of the Gulf region could likely benefit from stronger refining margins as prices on refined products rise and crude oil prices fall as crude oil could be temporarily oversupplied. In our opinion, it is unlikely that diversified refining companies would face downgrades or negative outlook revisions, since we believe that EBITDA would only be modestly hurt even if some of these assets were down for several weeks in a worst-case scenario.
We view this event as an unplanned outage, which will lead to a weaker-than-expected 2017 third quarter. We rarely change ratings or outlooks based on one quarter's results, given the inherent volatility in the sector.
Table: U.S. Gulf Region Refining Capacity
|Refining capacity (bbl/d)|
|Alon USA Partners L.P.||73,000||N/A|
|CITGO Holding Inc./CITGO Petroleum Corp.||157,000||425,000|
|Deer Park Refining L.P.||340,000||N/A|
|Flint Hill Resources LLC||300,000||N/A|
|Marathon Petroleum Corp.||545,000||543,000|
|PBF Holding Co. LLC||N/A||189,000|
|Valero Energy Corp.||1,360,000||475,000|
|Total by State||5,083,800||3,143,500|
|Total US Refining Capacity||18,557,000||N/A|
|Total refining capacity at risk||27.4%||16.9%|
bbl/d--Barrels per day. N/A--Not applicable. Sources: Company reports, U.S. Energy Information Administration, and S&P Global Ratings.
On the other hand, we think refining companies with less geographic and asset diversity, such as Motiva Enterprises LLC or Deer Park Refining L.P., are more at risk if the refinery outage is prolonged, and credit measures approach our triggers for downgrades. We would also have to consider the strong sponsors that back both Motiva (Saudi Arabian Oil Co., or Saudi Aramco; unrated) and Deer Park (Royal Dutch Shell PLC) and their willingness to provide ongoing support to these assets, which we think is highly likely.
Of note, we think most of the refining capacity that does come back on line could operate at significantly lower utilization levels, given that many midstream assets, including processing plants, storage, and refined product-takeaway pipelines, could be temporarily shut under "force majeure" considerations or because they're unable to receive finished refined products, which would hinder a refiner's ability to ramp up production. For example, the Explorer Pipeline (unrated), which runs from Texas to Illinois, closed temporarily due to a lack of refined products, to allow product to build so it can restart shipping products to the Chicago demand center. S&P Global Ratings currently rates 16 independent merchant refineries, of which 10 have assets in the affected areas.
Table: U.S. Independent Merchant Refiner Ratings
|Issuer||Corporate Credit Rating||Business Risk||Financial Risk||Assets In Affected Area *|
|Flint Hills Resources LLC||AA-/Stable/A-1+||Satisfactory||Minimal||Yes|
|Deer Park Refining L.P.||BBB+/Stable/--||Fair||Intermediate||Yes|
|Marathon Petroleum Corp.||BBB/Stable/A-2||Satisfactory||Intermediate||Yes|
|Motiva Enterprises LLC||BBB/Stable/A-2||Fair||Significant||Yes|
|Valero Energy Corp.||BBB/Stable/--||Satisfactory||Intermediate||Yes|
|PBF Holding Co. LLC||BB/Stable/--||Fair||Significant||Yes|
|Alon USA Partners L.P.||BB-/Stable/--||Vulnerable||Significant||Yes|
|CVR Refining L.P.||BB-/Stable/--||Weak||Significant||No|
|United Refining Co.||B+/Stable/--||Vulnerable||Intermediate||No|
|Calumet Specialty Products Partners L.P.||B-/Negative/--||Weak||Highly Leveraged||Yes|
|CITGO Holding Inc.||B-/Stable/--||Fair||Aggressive||Yes|
|CITGO Petroleum Corp.||B-/Stable/--||Fair||Aggressive||Yes|
|Philadelphia Energy Solutions Refining and Marketing LLC||CCC/Negative/--||Vulnerable||Highly Leveraged||No|
*Texas or Louisiana Gulf Coast. Source: S&P Global Platts.
How have midstream companies rated by S&P Global Ratings been affected?
Although reports indicate partial outages on assets in the affected areas, we don't expect this to result in any ratings changes. For example, Colonial Pipeline Co. is running at reduced capacity because it can't receive refined products from the Houston refinery complex. Explorer Pipeline Co., which runs from Texas to Illinois, closed temporarily due to a lack of refined products, to allow product to build so it can restart shipping products to the Chicago demand center. Magellan Midstream L.P. halted operations on its two long-haul pipelines BridgeTex and Longhorn, which carry a total of 675,000 bbl/d of crude from the Permian basin to the U.S. Gulf Coast. It appears that Kinder Morgan Inc. is in the process of restoring service to various assets (NGPL PipeCo LLC, Tennessee Gas Pipeline Co., Kinder Morgan Crude and Condensate LLC, and Double Eagle terminals) with the impact to overall operations expected to be immaterial.
Have hydrocarbon prices reacted and what, if any, impact might this have on ratings?
No, prices haven't reacted much, outside of some widening of oil differentials. However, it's still too early to determine the ultimate effect on prices. If a majority of the refining capacity stays down for a prolonged period, there will clearly be no offtake for producers to unload crude, leading to a buildup in crude inventory levels, particularly at Cushing, Texas.
From the exploration and production (E&P) perspective, U.S. producers, especially high yield producers, could come under ratings pressure if the price of West Texas Intermediate (WTI) declined below $40 and we believed it remain there for the near to medium term. The question remains just how much and for how long refining capacity remains shuttered. With respect to natural gas prices, the storm has barely registered in the U.S. natural gas markets. Henry Hub natural gas prices have stuck close to their recent anchor of $3 per mmBtu.
It's important to understand that the storm hasn't had quite the same impact it would have had on production 10 years ago. This is largely due to the growth of U.S. shale production over the past decade. To put this in perspective, a decade ago, oil production out of the Gulf accounted for closer to 30% of U.S. crude output and 20% of natural gas output. Now, the Gulf of Mexico region accounts for 17% of total U.S. crude-oil production and 5% of total domestic dry natural-gas production, according to the latest figures from the U.S. Energy Information Administration.
The storm has certainly had some impact on production in the Gulf region, but it appears minimal and temporary. Based on operator reports, approximately 19% or 331 bbl/d of the current oil production of 1.75mmbbl/d of oil in the region has been shut in. About 19.1% of the Gulf region's natural gas production or 615 million cubic feet per day has been shut in. To put this in further perspective, Harvey's impact was much less for offshore production than Hurricane Ivan's was in 2004, or Hurricane Katrina in 2005. Hurricane Ivan caused the loss of one million barrels of production a day, while hurricanes Katrina and Rita totaled 1.5 million bbl/d.
Has Harvey Affected Gulf Coast Liquefied Natural Gas projects?
In addition to being home to the majority of the nation's oil refining facilities, the Gulf Coast is also the epicenter of the burgeoning liquefied natural gas (LNG) industry. Since 2013, we've rated four LNG export projects: Cameron LNG LLC, Cheniere Corpus Christi Holdings LLC, Sabine Pass Liquefaction LLC, and FLNG Liquefaction 2 LLC (FLNG 2). All of the projects are still under construction, though Sabine Pass is already shipping cargos from its three completed LNG trains.
Even before Harvey made landfall, Cameron LNG had been beset by significant construction delays due to earlier weather-related issues and FLNG 2 had notified its lenders in June of a three-month construction delay. Based on initial reports, we don't expect Harvey's impact to be enduring, or to prompt immediate ratings action. At first glance, the storm doesn't seem to have caused structural damage to the facilities, in part due to the engineering procurement construction contractors at the sites having sufficient notice to prepare for the storm in the days leading up to it. Both Corpus Christi and FLNG 2 confirmed publicly there was no visible damage, but it will take time before the extent of damage, if any, is known.
Of course, with significant flooding in the region, construction is likely to be slowed temporarily as workers will have difficulty returning to the sites, some of which are relatively isolated, with limited access roads that are likely flooded given their location next to low-lying ship channels. There could also be a ramp-up period for construction as workers in the Gulf are also likely dealing with flooding of their personal residences, which could delay full workforce redeployment. Still, each of the projects have some headroom between the expected completion date of the construction and initial debt service repayment and contract dates, and, in the case of Cameron LNG, completion risk is assumed by its offtakers. In coming weeks, we'll be discussing the storm's full impact for each of the LNG facilities, including how, if at all, they expect to make up for lost construction time.
For its part, Sabine Pass Liquefaction, not directly in the track of the storm like Corpus Christi, seems to have been largely unaffected, and at least as of Monday (Aug. 28), was still shipping cargoes.