The North American midstream energy industry has generally been resilient through economic and structural challenges. These include the Great Recession of 2007-2009 and the change in investor sentiment toward the master limited partnership model in 2015-2017, when the equity markets closed as a source of funding. During both these periods, midstream companies focused on a key financial tenet: maintaining ample liquidity and financial flexibility. While there are other key financial factors that influence credit quality, a failure to ensure adequate liquidity will quickly lead to financial stress and credit-quality problems, including impeding the ability to manage refinancing risk.
Liquidity is more important than ever during the economic stress caused by the global coronavirus pandemic and the crude oil price war between Saudi Arabia and Russia. COVID-19 is causing significant demand erosion for crude oil, refined products, and other commodities transported by the midstream value chain, and it's uncertain when demand will improve. Falling crude oil prices have significantly weakened North American exploration and production companies' credit profiles, which could in turn affect midstream credit quality.
- For the next few years, most North American midstream companies' debt-maturity profiles seem manageable, largely because these companies were strong prior to the pandemic and plunge in oil prices.
- However, this view could change if exploration and production companies recover more slowly than we anticipate, in turn prolonging midstream companies' recovery.
- Gathering and processing companies could have heightened credit risk in the next five years because most of their debt matures in 2022, 2024, and 2025.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Most midstream companies are financially well-positioned to deal with the immediate shocks of COVID-19 and weak oil prices. The industry is now generally free-cash-flow positive and has sufficient room on revolving credit facilities to address short-term cash needs or refinancing requirements.
The debt capital markets were essentially closed for most of March as the global economy shut down from the pandemic and shelter-in-place orders spread across the U.S. The announcements by the Federal Reserve Bank and the Bank of Canada that they were providing liquidity backstops for investment-grade corporate debt went a long way to calming markets. On April 2, TransCanada PipeLines Ltd. issued C$2 billion seven-year notes and US$1.25 billion 10-year notes, which is the first midstream debt issuance since ONEOK Inc.'s $1.75 billion debt issuance on March 5. We expect investment-grade companies to have access to the markets and the ability to choose when to refinance upcoming debt maturities. On the other hand, their speculative-grade peers will have a much more difficult time refinancing maturing debt over the next 12-18 months because the public debt markets are essentially closed to them.
For the midstream companies we cover, debt due through 2025 totals about $227.2 billion (see Chart 1).
Debt maturities appear manageable in 2020 and 2021, with $18.2 billion and $22.8 billion, respectively, coming due. For the three years after that (2022-2024), debt maturities increase to about $40 billion per year, and then they spike to $65 billion in 2025. About 33% ($161.8 billion) of the total rated debt of $487.1 billion matures in 2030 and beyond. This demonstrates the long useful life of these companies' assets but also highlights possible longer-term risks, such as transitions to energy alternatives and declines in asset valuations.
Debt maturities over the next two years are mainly from investment-grade issuers (see Chart 2). In 2020, about 85% of the $18.2 billion coming due is investment-grade ('BBB-' or higher) debt. In 2021, about 77% of the $22.8 billion of debt maturing is investment grade. In our view, this bodes well for refinancing, as the markets generally are open for investment-grade issuers.
That said, 2020 will likely be difficult for some midstream companies. One example is Ferrellgas L.P. (CC/Negative/--), the operating subsidiary of propane distributor Ferrellgas Partners LP. Despite the company having successfully placed $750 million of senior secured notes due 2025 at a 10% coupon, its parent has a looming debt maturity totaling $357 million due June 15, which we believe will have to be restructured. Another example is Martin Midstream Partners L.P. (CCC-/Negative/--), which has maturities of $201 million under its revolving credit facility balance due in August 2023. If Martin is unable to refinance the $374 million senior unsecured notes due February 2021 before Aug. 19, 2020, the maturity of the credit facility will accelerate to August 2020.
In addition, CSI Compressco LP, a natural gas compression services partnership, has offered to exchange its senior unsecured notes due 2022 for new secured first- and second-lien notes with extended tenors. It is offering this exchange at a significant discount to par. We lowered our issuer credit rating on CSI to 'CC' from 'B-' and our rating on CSI's 2022 notes to 'C' from 'CCC+' to reflect our view that this transaction, if completed, would constitute a selective default. While we recognize the value of additional security, we believe noteholders are being offered less than the 2022 notes promised.
Some speculative-grade issuers--typically those with good assets in desirable locations--have had success in accessing debt markets, though at a higher cost than their investment-grade counterparts. For example, NuStar Energy L.P., a liquids terminal and pipeline operator, obtained a three-year, $750 million unsecured term loan at an interest rate of 12% on April 19, 2020. The new financing gives NuStar additional liquidity and flexibility to refinance its $450 million September 2020 maturity and $300 million maturity in February 2021, effectively eliminating its refinancing risk.
To analyze maturities by business type, we separated the midstream portfolio into eight segments (see Chart 3).
Diversified energy issuers--which includes companies such as Kinder Morgan Inc., Energy Transfer LP, Enterprise Products Partners L.P., TC Energy Corp., and Enbridge Inc.--dominate the debt-maturity schedule, with about 50% of total debt. Oil and refined products logistics operators, including Plains All American Pipeline L.P. and Magellan Midstream Partners L.P., account for 21% of total maturities. These two segments consist mainly of investment-grade companies with relatively high credit quality.
Gathering and processing companies, which account for 13% of total rated debt (about $65 billion), could have heightened credit risk in the next five years because most of their debt matures in 2022, 2024, and 2025. Given the challenges in the current market, these companies are already trying to prepare. DCP Midstream LP, Targa Resources Corp., and Western Midstream Operating LP have announced significant capital-spending and distribution reductions, which gives them the ability to use the excess cash for debt reduction.
For the next few years, most North American midstream companies' debt-maturity profiles seem manageable. However, given the uncertainty regarding the pace and timing of the recovery for exploration and production companies, end-user demand, and how that could affect midstream companies, our view on this could change. As 2021 approaches and more information is available, we will update our view in the context of absolute debt levels and the likely path forward.
This report does not constitute a rating action.
|Primary Credit Analyst:||Michael V Grande, New York (1) 212-438-2242;|
|Secondary Contact:||Zachary S Fiore, New York;|
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