Fitch Ratings has assigned an 'A-' rating to
EPO is the operating partnership for master limited partnership (MLP)
The ratings are supported by EPD's large size and diverse stream of stable profits. The company's assets fit well together in a value chain that has shown, year after year, an ability to capture value during volatile conditions. Concerns include the risk of a global recession and the potential for a mild amount of construction risk.
The Stable Outlook reflects Fitch's expectation that EPD will maintain run-rate leverage at approximately 3.0x.
Key Rating Drivers
Reliable Steady Volume Growth: Forecasts from a variety of sources portray long-term steady growth for the entire Exploration & Production industry in the Permian region, which is one of the important regions for EPD. Across its entire footprint, EPD has an unmatched integrated network among midstream companies. This network, among other things, helps EPD keep field area volumes high, on a 'demand pull' dynamic. Volumes are reliable. For instance, in the fee-based processing activity category, the 2Q21-to-3Q21 period was the last time EPD posted a negative percentage change.
Since midstream companies are generally required to spend capex 10-18 months in advance of new planned wells, many were hurt by the previous era of aggressive growth plans that featured many 'busts'. Steady growth is advantageous for midstream companies, and the year-to-date
New Financial Policy: On
EPD also noted that its new policy conforms to the typical leverage of companies in corporate America that have a multi-decade record of increasing dividends. Indeed, EPD is the only
Low Business Risk: In 2017, EPD finished a large capex program that, while strategically successful, caused elevated leverage in prior years. Over the 2018-2022 period, the company kept its annual leverage within an approximately half-a-turn range. This fact is impressive given that minimum volume commitments from customers were mainly limited to large new-build assets. This leverage performance stamped EPD as unique among its
Since 2018, the company has built up the strength of its credit quality. EPD has consistently beat the 2018-vintage and later Fitch EBITDA and leverage forecasts. EPD has also lowered the leverage target included in its financial policies more than once, including the aforementioned announcement in early 2023.
Derivation Summary
Like EPD,
EPD is rated one notch higher than ENB due to its much lower expected leverage, somewhat offset by Fitch's view that ENB has somewhat less business risk than EPD.
Key Assumptions
Fitch oil and natural gas price deck;
2023 and 2024 EBITDA rises steadily from the 2022 level, reflecting rising volumes on many assets, and the completion of new assets;
Increases in distributions and common unit repurchase activity, in aggregate, will exhibit positive growth for equity-holders; however, this aggregate flow will not show any significant step-change; and
Maintenance capex and growth capital investing for the forecast period relatively level to the expected 2023 grand total (
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade is not anticipated; however, EBITDA leverage sustained below 2.5x in conjunction with maintaining or lowering business risk could lead to a positive rating action.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage above 3.2x on a sustained basis;
An acquisition that significantly raises the overall business risk for the partnership and/or meaningfully increases leverage even after 24 months from closing.
Liquidity and Debt Structure
Strong Liquidity: As of
EPO does not have any significant levels of maturities coming due over the next few years. Fitch expects the company to continue to generate positive FCF.
Issuer Profile
EPD is among the leading companies facilitating global hydrocarbon commerce.
Summary of Financial Adjustments
Fitch calculates midstream energy companies' EBITDA by using cash distributions from unconsolidated affiliates, rather than by using equity in earnings. Additionally, Fitch removes from EPD's EBITDA the net income attributable to non-controlling interests. Fitch treats EPO's junior subordinated notes as having 50% equity content, per its criteria for 'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis.'
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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