Daily Update: December 9, 2021

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

There appears to be no end in sight for the saga over the Nord Stream 2 gas pipeline.

After a long and arduous construction process stalled by sanctions, the 764-mile (1,230-kilometer) conduit that would transport gas from Russia to Germany and central Europe has been built by the Kremlin-controlled gas company Gazprom but has yet to transmit gas.

The U.S. under the Trump Administration criticized the Nord Stream 2 as a venture for Russia to exert control in Europe. German and Russian officials have asserted that the project is commercial and that the U.S.’s  sanctions interference undermined their respective countries’ energy supplies. But new challenges to the pipeline’s operations—including legal challenges and increasing tensions between Russia and Ukraine—have created new questions over when and whether Nord Stream 2 will become functional.

Germany's energy regulator, Bundesnetzagentur, suspended the procedure to certify the pipeline as an independent transmission operator on Nov.  15 and required that a newly announced subsidiary of Nord Stream 2 created by the operator would need to submit an application for certification to ensure its legality under German law, according to S&P Global Platts. The Kremlin, which had been waiting for the regulatory approval, said in response on Nov. 17 that “the operator company is ready to fulfill all the requirements of the current legislation.” Market participants said the certification process is likely to take several months.

Those challenges have been eclipsed by new geopolitical conflicts. If Russia invades Ukraine, the Biden Administration warned this week that the U.S. would impose harsh economic sanctions that would block the startup of Nord Stream 2.

"Gas is not currently flowing through the Nord Stream 2 pipeline, which means it's not operating, which means it's not leverage for [Russian President Vladimir] Putin," U.S. National Security Advisor Jake Sullivan said during a White House briefing following President Biden’s roughly two-hour video call with Mr. Putin on Dec. 7. "Indeed, it is leverage for the West because if Vladimir Putin wants to see gas flow through that pipeline, he may not want to take the risk of invading Ukraine."

The circumvention of Ukrainian natural gas transport for Russian exports to Europe is "the only goal" of the Nord Stream 2 pipeline system, Yuriy Vitrenko, CEO of Ukraine’s largest oil and gas company, Naftogaz Ukrainiy, told delegates at the S&P Global Platts European gas and LNG conference on Nov. 24. "Nord Stream 2 is a geopolitical project … Russia wants to essentially punish Ukraine for its European choice, and that is why they are building pipelines: just to bypass Ukraine."

Russia and its state-owned energy company Gazprom have faced accusations of market manipulation and unreliability from its European neighbors.

European countries have claimed that Russia has contributed to the energy crisis that has sent European and U.K. power prices soaring and shut down providers in the latter half of this year. Market participants and parliamentarians alike see Russia as the key to calming European gas prices with a tough winter on the horizon, and have criticized Russia for not booking additional gas capacity via Ukraine and Belarus to supply greater amounts of gas to Europe during the price crunch. Russia said in response that it would supply gas to its European counterparts if asked, but that no one had asked for additional supply. 

Additionally, Gazprom’s Nov. 24 warning that it would stop supplying natural gas to Moldova within 48 hours if it didn’t receive debt payments from the country for supplies accrued up to Nov. 22 prompted analysts to signal that any such suspension could be interpreted as Gazprom being an unreliable supplier, according to S&P Global Platts. 

Today is Thursday, December 9, 2021, and here is today’s essential intelligence.

The Credit Cycle

Leveraged Finance: Assessing The Damage: How Weakening Debt Structures And Loan Terms Diluted First-Lien Credit Quality

Potential default risk has increased significantly, indicated by the decline in average issuer credit ratings. Financial risk has risen for corporate borrowers as debt markets opened to companies with aggressive financial strategies, including highly leveraged acquisition strategies and leveraged dividend recapitalizations; and expectations for recovery-given-default on first-lien loans have deteriorated meaningfully in recent years.

—Read the full article from S&P Global Ratings

How A 300bp Rise In Inflation And Interest Rates Could Hit Borrowers

Persistent inflation, tied to supply chain disruptions and energy prices, could trigger wage inflation and push the Fed and other central banks to hike rates faster. This could spark market volatility, amplified by elevated debt levels.

—Read the full article from S&P Global Ratings

Market Dynamics

Gas Utilities See Earnings Decline In Q3; Few Beat Wall Street Estimates

Natural gas utility operators largely saw earnings slump in the third quarter of 2021 from the year-ago period, with just three companies in a select group topping Wall Street's expectations for quarterly EPS. The results extended and deepened the previous quarter's earnings slump following a period of strong EPS growth, an outcome largely anticipated by analysts.

—Read the full article from S&P Global Market Intelligence

Banking Industry Under Pressure

European Banks' Payout Ratio Rises Amid 'Catch-Up' Dividends, Buybacks

European banks are expected to carry out dividend payments and share buybacks representing 74.8% of 2020 earnings this year as they catch up on pandemic-linked delays to distributions, according to the European Banking Authority's annual risk assessment. Banks including ING Groep NV, Banco Bilbao Vizcaya Argentaria SA, and Nordea Bank Abp have already kicked off share repurchase programs.

—Read the full article from S&P Global Market Intelligence

Technology & Media

Despite Volatility, Earnings Miss, Analysts Remain Bullish On Redbox

DVDs may be dead, but DVD-kiosk company Redbox Automated Retail LLC is attempting to breathe life into its business with its digital ambitions. The company completed its reverse merger with special purpose acquisition company Seaport Global and began trading on the Nasdaq exchange Oct. 25.

—Read the full article from S&P Global Market Intelligence

Pipeline Operators Face Huge Challenge Preventing Repeat Of Colonial Hack

Seven months after a cyberattack shut down a major artery of gasoline supply in the U.S., the future of national pipeline cybersecurity remains largely unresolved, as government and industry grapple with hurdles to securing the nation's fuel backbone. Protecting the nation's pipelines will require addressing complex challenges presented by expanding vulnerabilities and evolving cyberthreats.

—Read the full article from S&P Global Market Intelligence

Stellantis, Foxconn Partner To Design, Sell New Purpose-Built Automotive Semiconductors

Automaker Stellantis and technology company Hon Hai Technology Group, or Foxconn, have agreed to partner to design and sell purpose-built semiconductors for Stellantis and other automakers, Stellantis announced at its Software Day 2021 held on Dec. 7. The two parties signed a non-binding memorandum of understanding to create the partnership, which will design a family of flexible semiconductors to support Stellantis vehicles and the company's initiatives to reduce semiconductor complexity.

—Read the full article from S&P Global Platts

Senate Confirms Jessica Rosenworcel As 1st FCC Chairwoman

The U.S. Senate voted Dec. 7 to confirm Biden's key telecom pick to her post at America's communications agency. Jessica Rosenworcel was confirmed for another five-year term with the Federal Communications Commission, just weeks before she would have had to leave her post. The Senate voted 68-31 on the decision, with one senator not voting.

—Read the full article from S&P Global Market Intelligence

ESG in the Time of COVID-19

Listen: Supreme Court Could Complicate US EPA Effort To Crackdown On Methane Emissions

Reducing carbon emissions has been a central tenet of the Biden administration's climate agenda. But methane is over 80 times more potent than carbon dioxide emissions in terms of global warming potential. Roughly a quarter of the warming occurring now is driven by methane, and the oil and gas sector is the single largest source of those emissions in the U.S.

—Read the full article from S&P Global Platts

COP26: Implications For The Financial Sector

The COP26 successfully concluded with a last-minute Glasgow Climate Pact which brought important progress to keep global warming below 2ºC. Whilst the final agreement did not go as far as some had hoped, it does represent a good compromise and it sets the global agenda on climate change for the next decade.

—Read the full article from S&P Global Market Intelligence

Another La. Property Insurer May Succumb To Hurricane Ida Losses

Management statements made within note 1 section D of a recently filed regulatory statement indicate that Americas Insurance Co. is "insolvent." The Louisiana-focused homeowners insurer estimates losses from Hurricane Ida of between $225 million and $230 million, which exceeds the $180 million in reinsurance coverage the insurer had for such events.

—Read the full article from S&P Global Market Intelligence

West Texas Freeze Brings Permian Basin Winterization Push Into Focus

Wintry weather, forecast across West Texas over the next several days and this coming weekend, could bring wellhead freeze-offs and production cuts back to the Permian Basin as winterization efforts by the Texas legislature and the Texas Railroad Commission come increasingly into focus.

—Read the full article from S&P Global Platts

China's Energy Transition Hinges On Power Sector Recalibration, Market Forces

China's efforts to decarbonize its power sector has triggered intense debate about the role of its existing fossil fuel-based electricity system and the extent to which the system will have to be recalibrated. There is general consensus that an electricity supply chain based predominantly on renewables will have to be fundamentally different from one based on fossil fuels, mainly to handle intermittency issues and introduce market-based mechanisms for both power and carbon trading.

—Read the full article from S&P Global Platts

Canada Focuses On Emissions To Push Back Against Dirty Oil Sands Reputation

Canadian oil production is back on the rise from the pandemic and efforts are ongoing to invest more in emissions reduction, carbon capture, and more in order to make the industry better mesh with the ongoing energy transition and undo the longstanding reputation of the dirty oil sands.

—Read the full article from S&P Global Platts

Feature: VCM Buyers Show Increased Interest In Customized Carbon Credits

As interest and a better understanding of the voluntary carbon market builds among various participants, buyers are now taking an interest in the development of projects from the initial stages. A number of developers S&P Global Platts spoke to in the last few weeks have said they are customizing credits according to buyer requirements.

—Read the full article from S&P Global Platts

The Future of Energy & Commodities

Southern Co.'s 8.5M Customers Split Between Electric, Gas Utilities

Southern Co. executives indicated during their third-quarter earnings call they would be open to an asset sale to offset any equity needs. The Atlanta-headquartered utility traces its history back to the 1920s, according to its website. It has operated its three electric utility subsidiaries under a multistate holding company structure since 1947 that today serves about 4.3 million electric customers and owns nearly 32,000 MW of generating capacity.

—Read the full article from S&P Global Market Intelligence

Saudi Aramco Signs $15.5 Bil Gas Pipeline Deal; Continues To Monetize Assets

Saudi Aramco has signed a $15.5 billion lease deal for its gas pipeline network, its second infrastructure transaction with international investors, as part of plans to monetize its assets and strengthen its balance sheet. A consortium led by BlackRock Real Assets and Hassana Investment Co. will own a combined 49% of Aramco's gas pipeline network.

—Read the full article from S&P Global Platts

Yemen's Iran-Aligned Houthi Militia Claims Attack On Aramco Facilities In Jeddah

Yemen's Iran-aligned Houthi militia claimed responsibility for an attack on Saudi Aramco's facilities in the Red Sea port city of Jeddah, their military spokesman said on Twitter Dec. 7, amid continued attempts to sabotage Saudi Arabia's vital energy infrastructure. The Houthis attacked Jeddah with armed drones, Yahya Sare'e said in an address broadcast on Twitter. Aramco wasn't immediately available to comment on the alleged attack.

—Read the full article from S&P Global Platts

Ningbo Port Could See Disruption As Zhenhai District Goes Into 14-Day Lockdown: Sources

China has imposed a 14-day lockdown at Zhenhai, one of the six districts in Ningbo, amid an increase in coronavirus infections, prompting concerns of port disruptions and worsening supply chain blockages, market sources said. The increase in coronavirus infections may further disrupt the ocean freight industry by triggering higher demand for PPE kits and masks, in turn leading to higher freight rates.

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.