The overall outlook for the oil and gas pipeline sector will likely improve in 2021 even as its credit rating outlook remains negative, Fitch said in a Dec. 4 report.
Expectations that oil and natural gas production will continue to stabilize due to higher crude prices combined with industrywide spending cuts should put midstream companies in a better position than they were in even before the COVID-19 pandemic and oil price crash wreaked havoc on balance sheets in 2020.
"Most issuers in Fitch's midstream portfolio are better able, versus one year ago, to sustain unanticipated shifts in the operating environment via improved liquidity, reduced near-term debt maturities and lower planned spending," Thomas Brownsword, a senior director at the credit rating agency, said in a statement.
Regulatory Research Associates analyst Brian Collins recently noted that eight pipeline companies that had released capital spending forecasts as of Nov. 19 "plan to spend less in 2021 than they had forecast they would spend in their [post-coronavirus] 2020 capex revisions," and the remaining companies are expected to maintain "budget austerity measures."
As for the sector's negative rating outlook, the Fitch report said it "is skewed by smaller [gathering and processing] issuers with either a rating linkage to an upstream parent/counterparty or high exposure to producer volumes." If more drillers successfully reject or renegotiate gathering and processing contracts as Chapter 11 bankruptcy cases play out in courts, it would merit "heightened concern" for the segment, the credit rating agency said.
Midstream gathering and processing agreements are often written as real property interests, which are tied to the property and cannot be rejected in bankruptcy. The U.S. Bankruptcy Court for the District of Delaware, however, views some of those agreements as executory contracts that can be thrown out. It recently ruled that Extraction Oil & Gas Inc. and Southland Royalty Co. LLC can reject several gathering and processing agreements as part of the companies' Chapter 11 proceedings.
Meanwhile, oil and gas transportation agreements have come under fire at the U.S. Bankruptcy Court for the Southern District of Texas. Judge David Jones ruled that Chesapeake Energy Corp. can throw out a purchase agreement with Energy Transfer LP's ETC Tiger Pipeline LLC because it is not a real property interest "running with the land" and was written as an executory contract. His colleague, Judge Marvin Isgur, in August approved the rejection of Ultra Resources Inc.'s firm transportation agreement with Rockies Express Pipeline LLC.
Still, "only a handful of bankruptcies have resulted in transportation agreement rejections, the combined effect of which has been financially immaterial for midstream," Fitch said. "[Letters of credit] and the ability to re-market the pipeline capacity soften the negative impacts from the currently uncommon occurrence of contract rejection from upstream producer bankruptcies."
The rating agency's report comes just weeks after Moody's revised the global pipeline sector's first negative outlook back to stable. Moody's expected a combined 20-25% reduction of capital costs across the industry in 2021.
Regulatory Research Associates is a group within S&P Global Market Intelligence.