The sharp drop in oil prices and announced revisions to exploration and production (E&P) capital expenditure (capex) budgets should not impact master limited partnership (MLP) spending in the short run, but a sustained price drop could ramp up merger and acquisition (M&A) activity in the space, according to Fitch Ratings.
Many North American E&P companies have announced downward revisions in 2015 spending or are revising their numbers downward in response to fast-declining oil prices. Cuts announced to date include: ConocoPhillips (20%), Pioneer (21%), Sanchez (30%), Concho Resources (33%), Oasis Petroleum (45%) and Linn Energy (53%).
A major focus of cuts has been U.S. shale properties, given the typically high degree of flexibility in shale budgets (particularly for acreage that is held by production), versus stickier programs such as big offshore projects.
MLPs have been key beneficiaries of the shale revolution as they have built out shale-linked infrastructure projects connected to prolific liquids-rich basins. This strong need for natural gas liquid (NGL) processing and logistic capacity has led to heavy backlogs of projects and high future projected capex.
Under a scenario of sustained lower oil prices, Fitch expects to see reduced organic growth prospects and meaningful declines in the backlog as all but the best projects are scaled back. Depending on the ultimate level and locations of E&P spending cuts, this could start to happen toward the end of 2015.
Paradoxically, slower growth among MLPs may temporarily improve their credit ratios, as aggressive capex is scaled back, decreasing a need for increased borrowings, while EBITDA from already completed projects comes on. However, sustained lower organic growth prospects are also likely to weigh on distribution growth and could trigger a wave of M&A in the industry, as MLPs seek to keep distribution growth high through acquisitions.
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.
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