The outlook for credit quality in the US midstream energy sector for 2012 and 2013 is broadly stable despite mixed economic indicators in the United States, while the outlook for business conditions and credit quality in the US petroleum refining and marketing sector is generally favorable, according to a report published by Standard & Poor’s Ratings Services on October 15.
The report stated, “While our overall view is stable for midstream, certain subsectors will see beneficial trends, while others may come under some pressure. Many midstream companies continue to benefit from strong crude oil prices, solid volume flows, and adequate liquidity positions. However, natural gas liquids (NGL) prices are down notably in recent months, natural gas prices remain very low due to continued oversupply, and pipeline transportation rates in some areas of the country are going down.”
The reported continued, “Discounted Canadian and US crude oil feedstocks have improved refining margins, and we believe this will keep refiners’ financial performance adequate for ratings through 2013. However, there are several scenarios in which pressures could mount, particularly if high feedstock costs combine with weak refined product demand to reduce margins.”
S&P credit analyst William Ferara commented, “A diverging trend in commodity prices is affecting some midstream energy companies. Strong crude oil prices are supporting cash flows for some companies, but we expect weak NGL prices and low natural gas prices to continue in the near term.”
Midstream companies exposed to gathering, processing, and NGL infrastructure assets are the most exposed, and some have posted weak financial results so far in 2012, said Ferara. However, many of these companies have insulated themselves from near-term commodity price risk exposure by hedging a significant portion of their 2012 and 2013 expected volumes and undertaking projects with a high component of fee-based cash flows. He added that post-2013 cash flows are generally at risk and may suffer on a comparable basis.
In the refining sector, S&P said it expects generally stable demand for refined products in 2012 and 2013, although general economic trends and the price of crude oil can materially affect demand. The ratings agency believes that high and volatile feedstock costs may weigh on margins, but still expects most companies to perform similarly in 2012 as they did in 2011.