Moody’s Revises Outlook for Midstream Sector to Negative for First Time

The massive wave of shut-in production by E&Ps has started to take a toll on the midstream sector, according to a new report by Moody’s Investors Service.

The credit ratings firm recently changed the outlook for the global midstream energy sector to negative from stable for the first time, which Moody’s said reflects its view of a decline in the sector’s EBITDA growth this year.

Although midstream cash flow is largely insulated from the full brunt of commodity price and volumetric instability, Moody’s expects the rapid pace and the magnitude of recent production declines in the current downturn to result in at least a 5% decline to the midstream sector’s EBITDA growth in 2020, with only a slight return to growth in 2021.

“The negative outlook for the global midstream sector reflects the rapid pace and magnitude of production declines that have now spilled into midstream operations and will compromise the sector’s credit quality over the next 12 to 18 months,” Andrew Brooks, a Moody’s vice president-senior credit officer, said in a statement on June 11.

In response to low prices and storage limitations, a slew U.S. oil producers began turning off the taps by temporarily shutting in wells and curtailing production.

Rystad Energy estimated that gross U.S. cuts could reach at least 2 million bbl/d in June, including liquids. Further, U.S. oil production is forecasted by the research firm to reach a bottom of around 10.7 million bbl/d in June, marking a two-year low.

“Midstream throughput volumes have fallen in line with cuts in oil and gas exploration and production, the extent of which will depend on the duration of the economic downturn,” Brooks added in his statement. “Midstream firms’ contract structures and pricing will help ease the impact of volume declines, but not enough to avoid a decline in sector EBITDA, while the credit quality of individual midstream companies will depend largely on the composition and performance of their own assets.”

Certain midstream segments are more vulnerable than others, the Moody’s report noted.

Pipeline revenue for crude and refined products is susceptible to variable throughput volumes, which have recently declined. Additionally, natural gas gathering and processing entails both direct and indirect commodity price risk based on gathering field economics, and volumetric risk, based on the structures of processing contracts. 

However, interstate natural gas pipelines operate with regulated, fee-based contracts, and have little price or volume risk.

In the report, Moody’s also noted the additional risks midstream companies face from the deteriorating credit quality of their E&P customers, some of which are heading toward bankruptcy.

“During the 2015-16 energy downturn, midstream contract rejections were not widespread, with most contracts affirmed in bankruptcy,” Moody’s analysts wrote in the report. “Today, however, E&P companies will ratchet up demands for contractual concessions from the midstream operators, particularly if the economic contraction deepens.”