Renewed pressure on domestic energy production budgets has the potential to weigh on US midstream oil and gas volumes in the second half of 2017, according to Fitch Ratings. Volumetric risk remains the primary concern for gathering and processing operators, particularly with oil prices still lingering in the $45 to $50 per barrel range.
Recent meetings and roundtables with investors have focused on Fitch’s stable outlook for the midstream space. Positive trends in capital market access and liquidity have supported the midstream industry outlook. Still, higher cost of equity capital could raise leverage for some issuers, and credit metrics are stressed for some names. Volume pressure in second-half 2017 and 2018 could erode metrics further.
Geographic concentration is an important factor influencing midstream issuers’ operating outlooks. Outside of the more attractive Permian, SCOOP/STACK and Marcellus/Utica production basins, US midstream issuers expect to see lower volumes over the near term. Many issuers are pointing to the second half of the year as the period in which investors will see guidance supported by actual growth in volumes or the completion of projects that will generate new cash flows. However, the outlook for oil and gas production later in the year should remain a major focus area.
The Permian region is the clear winner in terms of growth potential. It continues to show volume increases in both crude and natural gas. The region’s overall production increased by 10% for the last twelve months (LTM) ended April 30, compared with the year-earlier period. Certain parts of Oklahoma have generated considerable excitement, specifically the SCOOP and STACK basins, but production within Oklahoma as a whole has not been strong, as legacy, higher-cost basins continue to see declines. The Eagle Ford region is looking particularly weak, as LTM April 30 natural gas production was down 12% yoy, though this change partially is due to producers shifting their focus to the liquid-rich portions of the play in pursuit of better unit economics. Oil production volumes in the Eagle Ford region are roughly flat yoy.
Rising regulatory risks also remain a concern for midstream companies, particularly those with new significant construction projects. New pipeline construction and existing pipeline expansion is becoming more difficult across the board as regulation grows. Increased state-level scrutiny could also weigh on project approvals, leading to inflated costs and/or project cancellations. While not necessarily an immediate credit concern, regulatory delays and uncertainty could negatively affect project returns and capital spending budgets.
More information regarding these and other issues, along with answers to investor questions concerning midstream structural simplification, incentive distribution buybacks and the outlook for M&A, can be found in the report ‘What Investors Want to Know: North American Midstream Energy.’ The report, published today, can be found at www.fitchratings.com. Additional information can be found in the report ‘North American Midstream Energy Handbook,’ dated July 7, 2017.
Source: Fitch Ratings