Moody's expects sponsored oil and gas pipeline partnerships to maintain "appropriate" debt ratios through at least the first half of 2019, even as they borrow more in the face of depressed equity markets.
Drillers and refiners are attracted to stashing their midstream assets in tax-advantaged master limited partnerships, which provide easier access to financing. This drop-down model has been adopted by independent producers such as Anadarko Petroleum Corp. and Antero Resources Corp. and by giants like Royal Dutch Shell PLC and BP PLC, whose MLPs serve as vehicles for raising cost-effective capital.
A pivot away from issuing public equity because of months of depressed midstream stock prices, however, means sponsored MLPs are turning toward debt as a financing solution.
"While we expect that many of the sponsored MLPs will raise their absolute debt levels in 2018, most appear to remain on track to maintain leverage ratios within an acceptable range for their ratings," Moody's analysts said in a May 16 report.
Still, MLPs' leverage can sometimes be unwelcome additions to parent companies' consolidated financial statements, according to Moody's. The report pointed to Western Gas Partners LP, MPLX LP and Andeavor Logistics LP — which MPLX parent Marathon Petroleum Corp. plans to acquire — as partnerships whose credit issuances use up whatever wiggle room their sponsors have to maintain their ratings.
CNX Resources Corp., Valero Energy Corp. and Antero, on the other hand, have the leeway to take on additional leverage through their MLPs without affecting ratings.
CNX Resources has a long list of potential drop-down inventory on the table for CNX Midstream Partners LP after selling its 95% interest in the Shirley-Pennsboro gathering system to the MLP in February.
When it comes to the sponsors' role, Moody's analyst said companies with higher ratings than their MLPs can boost those partnerships' credit profiles. This interdependent relationship can also be reversed.
"While its standalone MLP credit attributes could support a higher rating, high customer concentration risk with their sponsor, combined with controlling ownership by the sponsor, effectively limits the MLP's rating to that of its sponsor, as it does for Western Gas Partners," the report stated.
Anadarko and Western Gas Partners intend to continue taking advantage of their structure despite any potential debt concerns. Western Gas CEO Benjamin Fink said during the partnership's first-quarter earnings call that Anadarko's leverage as a "meaningful shipper" is key to expanding the midstream business. Anadarko CFO Robert Gwin said during the driller's own call that controlling midstream operations and having the capital markets access provided by Western Gas creates "tremendous long-term value."