Fitch: Reduced Liquidity Ahead for US Midstream Issuers
The use of revolvers to temporarily finance acquisitions or fund large capex projects is typically the largest use of liquidity in this space. Many companies are focused on large construction projects, particularly those associated with shale plays. Companies will need to have ample liquidity during this investment phase and the issuers Fitch evaluated currently appear to have adequate borrowing capacity even as capital market access has tightened and debt and equity issuances slowed.
The universe of issuers evaluated had only utilized 25% of total revolver capacity as of June 30, 2015. However, Fitch anticipates that midstream issuers are likely to utilize revolving credit facilities following a slowdown in capital markets activity since the end of second-quarter 2015.
Issuers in the midstream space have been hurt significantly by lower equity prices since commodity prices began their decline in late November 2014. The benchmark index for master limited partnerhsips (MLPs) is the Alerian MLP Index, which has dropped significantly since the end of second-quarter 2014. The higher cost of equity capital has made accessing the equity markets an unattractive option. Equity issuance slowed down notably in third-quarter 2015 when issuances were $1.8 billion versus $4.6 billion in the prior year period.
Debt issuance within the space also seems to be slowing as issuers were proactive in raising needed funding in the first half of the year. During third-quarter 2015, debt raised in the midstream space was down. In the recent quarter, it was $5.4 billion compared with $10.5 billion in third-quarter 2014 and significantly lower than the $17.8 billion raised in the second-quarter 2015. Total debt issuances have been strong throughout 2015. In the first nine months of 2015, total debt raised was $44.3 billion, compared with $39.7 billion in 2014, according to data from SNL Energy. In the first nine months of 2015, equity raises were $15.8 billion compared with $18.6 billion in 2014.
The midstream space is expected to have sufficient liquidity over the next few quarters, with limited need to access capital markets for most issuers, as most funding needs seem to have been largely shored up in advance of the unattractive capital markets experienced in third-quarter 2015. Liquidity will be slightly reduced from levels seen at the end of second-quarter 2015.
Ultimately, issuers in the midstream space will need to return to the debt and capital markets to fund spending requirements and Fitch expects issuers to be opportunistic in doing so. Should equity remain expensive, midstream names may consider financing alternatives, including asset sales and hybrid issuances. Issuers seeking growth that do not have the balance sheet for it may look to form joint ventures or slow distribution growth to retain more cash. Issuers with stronger balance sheets may pursue acquisitions.