Moody's downgraded the global pipeline sector's outlook to negative from stable for the first time to reflect historic supply and demand disruptions upending the traditionally stable energy industry segment.
"Although midstream cash flow is largely insulated from the full brunt of commodity price and volumetric instability, the rapid pace and the magnitude of production declines have finally spilled into the midstream sector, compromising its aggregate credit quality," the credit rating agency wrote in a June 10 report. "While the midstream asset base is largely 'must-run' infrastructure, striving for contractually supported fixed-fee cash flow, not all of the midstream sector's revenue and earnings are fully insulated from commodity price and volume risk."
Over the next 12 to 18 months, Moody's expects midstream EBITDA will shrink by at least 5% alongside decreases in U.S. oil and gas production and the end of a North American pipeline infrastructure construction wave.
North American midstream firms had long planned to cut growth spending in 2020, but Russia's oil price war with Saudi Arabia and the COVID-19 pandemic forced them to slash budgets further and trim investor payouts. Industry analysts believe U.S. drilling reached trough levels earlier than expected, setting the stage for a recovery in July and August as producers reverse shut-ins, but sector earnings are still projected to take a huge hit in the second quarter and beyond.
Aggregate asset impairments announced across the North American pipeline industry in 2020 have reached $15.8 billion, already surpassing the $15.6 billion write-downs observed over the entirety of 2015 among the same companies, according to Regulatory Research Associates.
"The end of curtailments won't offset production declines that likely bottom in mid-2021. The pain has only really just begun fundamentally," Robert W. Baird & Co. analyst Ethan Bellamy recently said. "With very few exceptions, however, the U.S. hydrocarbon infrastructure network is overbuilt for the next three to five years, so we may be beyond the drama of negative oil prices but we are still deep in the woods."
On the credit side, according to Moody's, producers who are forced into filing for bankruptcy protection will more aggressively target their midstream contracts than during previous oil price crises.
"During the 2015-16 energy downturn, midstream contract rejections were not widespread, with most contracts affirmed in bankruptcy. Today, however, [exploration and production] companies will ratchet up demands for contractual concessions from the midstream operators," the rating agency said.
Ultra Petroleum Corp. recently asked a bankruptcy court to void a firm natural gas transportation agreement requiring the corporation to pay as much as $178 million to Rockies Express Pipeline LLC. In addition to Whiting Petroleum Corp. which filed for bankruptcy in April, Chesapeake Energy Corp. and Oasis Petroleum Inc. are also candidates for Chapter 11.
Regulatory Research Associates is a group within S&P Global Market Intelligence.