Fitch: Midstream Energy Counters Price Uncertainty

Credit quality for midstream energy issuers and master limited partnership (MLP) closed-end funds (CEFs) remains stable even as uncertainty and commodity price weakness weigh on investor sentiment, according to Fitch Ratings.

Equity price weakness has not affected capital market access which has remained strong. Midstream issuers and MLP CEFs have been taking advantage of continued low interest rates accessing both debt and equity markets with relative ease. A favorable borrowing environment is likely to continue ahead of any potential rise in interest rates.

Production growth for crude oil, natural gas, and natural gas liquids (NGLs) continues, highlighting the need for additional midstream energy infrastructure. Cash flow profiles for most issuers remain relatively stable, with only select highly commodity price-sensitive issuers negatively affected in the near term.

We expect the near-term implications of low commodity prices to be limited for midstream energy issuers and expect similar stability in credit quality for MLP CEFs despite net asset value (NAV) declines due to overcollateralization for funds.

Fitch expects a relatively quick rebound in commodity prices, with crude back at a $75/barrel level by 2017, as cuts by producers help moderate the current oversupply situation.

MLP CEFs have modestly shifted their holdings as a function of the drop in crude oil, natural gas, and NGL prices. CEFs have slightly decreased their exposure to midstream services names in favor of increased exposure to crude and refined products transportation and terminals. Price declines and active management have both contributed to this shift.

Potentially longer lasting price weakness remains a concern as we would expect under that scenario midstream issuer credit quality would come under pressure, growth would slow and midstream names would be expected to focus on maintaining liquidity. Any impact to individual issuers will differ based on asset mix, with gathering and processing names likely the most exposed. Equity prices would fall, further pressuring CEF NAVs. However, for CEF issuers, overcollaterization should provide enough cushion in credit profiles to weather additional declines in MLP equity prices.

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: Midstream Energy Counters Price Uncertainty (Closed-End Funds Shift Holdings after Market Declines)

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