Major energy pipeline companies that have recently streamlined their operating structures improved their ability to ride out potential interest rate hikes in 2019 after a year of four increases, credit analysts said, but higher borrowing costs could saddle some debt-laden firms with extra risk as planned capital-intensive projects accumulate.
Chairman Jerome Powell said the Fed plans to "watch patiently and carefully" before increasing interest rates.
Many midstream companies pre-empted negative impacts from the Federal Reserve's rate hikes in 2018 by making moves to retain cash such as abandoning the master limited partnership structure's required payments to general partners.
If the Fed raises rates, the higher borrowing costs "will kind of eat into their excess cash flow, but in the past the problem was that … they didn't have any excess cash flow, and it was affecting their distribution coverage," S&P Global Ratings midstream energy analyst Michael Grande said in an interview. "It's slightly less of a burden than it was in the past."
Any remaining MLPs also have a leg up because existing and planned capital projects generate guaranteed revenues through fee-based contracts, CreditSights midstream analyst Charles Johnston explained. "MLPs have fared better than other yield-oriented sectors in times of rising interest rates, and this is just because ... that growth has kind of blunted the impact," he said in an interview. "I expect this will continue through 2019 because the sector is still working through some pretty sizable projects and we saw some pretty large ones come online last year."
Credit ratings for some pipeline heavyweights also recently improved. S&P Global upgraded Energy Transfer LP and Williams Cos. Inc. from junk to investment grade during the second half of 2018 after both companies completed internal mergers, while the ratings agency in January bumped up Kinder Morgan Inc. to BBB — two notches above junk — to reflect the company's focus on strengthening its balance sheet through self-funding equity needs. Many of the biggest North American oil and gas pipeline firms are clustered around BBB.
Fitch Ratings, meanwhile, forecast that growing crude oil and natural gas volumes will further bolster North American midstream credit in 2019 by increasing quarterly earnings, which can contribute to deleveraging efforts.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.