The North American midstream oil and gas sector's push toward alternative sources of funding could hurt credit outlooks in 2018 despite stabilized commodity prices and high anticipated production volumes, Fitch Ratings analysts said.
"Equity price weakness is stemming from relative weakness to the S&P 500, doubts about [master limited partnership] distributions (whether lower growth or cuts), volume risk, tax selling and rising interest rates," they wrote in a Dec. 4 note to clients. "This market dislocation is pushing issuers to fill funding gaps using alternative sources of capital, committing issuers to asset sales, preferred equity distributions or joint ventures on projects, which will weigh on cash flow and returns. Fitch remains concerned that equity price weakness will inhibit issuers' ability and willingness to issue equity, which will lead to higher leverage, consolidation or other structural changes that could affect credit profiles."
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With MLPs facing investor skepticism about valuations, Fitch expects the alternate-funding trend to pick up in 2018 as more issuers in the sector focus on their distribution policies.
In recent weeks, Enterprise Products Partners LP, MPLX LP, Buckeye Partners LP, Genesis Energy LP and Magellan Midstream Partners LP have all announced plans to either stop or modify distribution growth and use the excess cash for equity funding.
The ratings agency also forecast that "larger legacy midstream names" will face even more competition from gathering entities backed by exploration and production companies and private equity, which is pouring into the booming Permian Basin and in some cases outbidding heavyweights like Energy Transfer Partners LP.
Even though oil and natural gas gathering and processing operations are now primarily supported by fee-based contracts, Fitch added, they remain exposed to risks from producers.
"Volumetric risk remains a concern. Minimum volume commitments benefit the sector but are limited with producers more apt to grant acreage dedications for future production rather than commit volumes," the analysts noted.
Still, they anticipate cash flow generation will remain consistent in 2018, and the analysts gave the sector a stable outlook as a whole.

