“Deep spending cuts in the exploration and production (E&P) sector have reduced midstream spending on growth projects that underpinned our positive outlook,” says Andrew Brooks, a Moody’s vice president and senior analyst. “The heavy infrastructure spending to develop US oil and natural gas shale resources fueled significant EBITDA growth in the sector over the past five years.”
Moody’s expects EBITDA growth to slow 3% to 5% in 2015, with the slowdown likely to continue into 2016 as well. Capital spending for new midstream assets is declining, which will negatively affect EBITDA. “Midstream energy companies have already built much of the infrastructure necessary to accommodate growth in US shale production by E&P companies,” notes Brooks.
Weak prices for natural gas and natural gas liquids (NGLs) have pressured the midstream industry’s gathering and processing margins, which would be exacerbated should volumes decline in NGLs and crude oil, according to the report “Outlook Reverts to Stable as E&P Weakness Migrates Downstream.”
In addition to lower growth prospects, increasing costs of capital will impede the financing of incremental growth. Moody’s says that focusing on mergers and acquisitions (M&A) and organic growth opportunities would only slightly improve aggregate midstream EBITDA growth rates.