Fitch: Consolidation to Continue in the US Midstream/MLP Space

Mergers and acquisition activity within the midstream/MLP space is likely to continue, provided funding remains available and attractively priced as MLPs continue to scale up, according to Fitch Ratings. Sponsor drop-downs of assets into associated MLPs will continue where available and opportunistic MLPs could look to acquire to diversify operations or scale up.

Fitch would expect to see industry consolidation among the MLPs to support distribution growth in the long term as the shale-supported infrastructure build out slows. However, the timing around this is relatively uncertain given expectations for the continued need for infrastructure.

Fitch does not expect to see a slowdown in spending over the next few years as the economics of North American shale plays remain very robust. That could change if there is a further downward shift in oil and gas pricing fundamentals, but we do not view that as likely.

To the extent that long-term growth does slow, we believe that midstream/MLP credit quality could be under some pressure, particularly speculative-grade issuers, as MLPs try to maintain distribution growth. In a lower growth environment, we expect merger and acquisition activity to outpace organic spending. Large scale investment-grade names -- which we expect would on average become more acquisitive under such a scenario -- should be advantaged from a credit perspective due to the economic and competitive advantages size and scale provide. Speculative-grade names would be under pressure to diversify operations and scale up to more effectively and, in turn, may be more likely to become acquisition targets under such a scenario.

Issuers without general partner incentive distribution rights would be under less pressure to grow and have a lower cost of capital, making their ability to earn on lower return projects stronger.

For additional answers to questions from investors, please see our special report titled, "What Investors Want to Know: Pipelines, Midstream and MLPs," which is available on our website www.fitchratings.com.

For further discussion on Midstream capital spending, see our report:

"Midstream Spending Significantly Rising for MLPs and C-Corps (August 2014)."

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:

What Investors Want to Know: Pipelines, Midstream and MLPs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=785149

Midstream Spending Significantly Rising for MLPs and C-Corps

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=759467

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