It is fortunate for the experts at S&P Global Ratings that they make their livings as analysts, not bakersthey are lousy at sugarcoating.

“Just when you thought things couldn’t get much worse, well, they did,” said Thomas Watters, managing director of S&P Global Ratings, in a recent midstream outlook webcast.

“Prices have been getting hammered due to mild weather patterns and oversupply conditions,” Watters continued. “Now, of course, we have fears of a global pandemic and a possible global recession.”

Overbuild is a concern, too.

“You’ve got export markets that are pretty much drying upwe hope temporarilyand production growth rates that are going to look like difficult to achieve at this point,” he said. 

Midstream is by definition dependent on the health of upstream, and E&Ps have been besieged by capital market access troubles over the past year or so. Then commodity prices plummeted and the situation became even dicier.

“It’s hard to find a silver lining in all this in terms of credit quality,” Watters said.

Full Plate

The big issue with E&Ps is overproduction.

“Counterparty credit risk is certainly weighing on credit profiles right now,” said Michael Grande, senior director of S&P Global Ratings and the midstream sector lead. “We’re seeing pressure on volumes in various basins. We think that this is a factor not only for high-yield names but we think that this could certainly weigh on some investment-grade credit profiles that have some volume exposure.”

That old bugaboo of permit approvals is more prominent now, he said. There are a number of pipelines that are held up for regulatory factors.

By midyear, the industry should have some clarity on those issues. The Supreme Court is hearing four cases involving pipelines this session: Atlantic Coast, Mountain Valley, PennEast and Nexus.

“Nevertheless, this is another kind of factor that can weigh on credit profiles with project delays and maybe even cancellations,” Grande said.

Growth Slowdown Not Baked Into Plans

“The Permian growth slowdown is another key risk,” Grande said. Many new entries into the space were counting on continued crude production growth and are now in a tough spot.

“The investment-grade companies that are participating in joint ventures and pipelines might be a little bit better positioned, but there is definitely going to be an overbuild situation in terms of crude pipes in the next few years that we’re going to have to evaluate,” he said.

Heading into 2020, the S&P Global Ratings analysts were concerned about a softening in demand and whether OPEC would continue with production cuts. On March 6, the answer came: Russia will not and OPEC members “will keep you wondering,” said Saudi Energy Minister Prince Abdulaziz bin Salman.

The decision was not entirely surprising. Based on his sources, Watters learned that some members of OPEC were viewing the cuts as “getting a little long in the tooth.”

It’s been a killer to prices, though. S&P Global Ratings expected a price retreat for any production cut less than 600,000 barrels per day (bbl/d). OPEC ministers must have agreed, because they recommended maintaining cuts through the year and reducing output by 1.5 million bbl/d in the second quarter.

By mid-afternoon on March 6, news of the lack of an agreement forced the two benchmarks down 8%. Brent had dropped almost $4/bbl and WTI was barely above $42/bbl.

Going On A Diet?

Complicating matters is the market reaction to the global spread of COVID-19, which had infected more than 100,000 people as of March 6. Watters expected OPEC, along with the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) to revise demand growth estimates downward for 2020. On March 9, the EIA said it would delay release of its Short-Term Energy Outlook until March 11 to incorporate recent global market events.

Will there be a contraction in oil demand? That would be hard to predict, he said, but it hasn’t happened since 2008-2009.

For clarity on natural gas, look to Asia.

“We know the virus has weakened LNG prices to record lows due to declining Chinese demand,” Watters said. “The big question is what happens in South Korea. They happen to be the largest buyer of U.S. LNG.”

A reduction in imports from South Korea will push back into U.S. gas inventory, already at very high levels. The EIA reported that as of Feb. 28, storage was 48% above the level recorded a year earlier.

“It’s unclear at this time if there is any U.S. LNG shut-in to balance global LNG,” Watters said, “but if we did it would exacerbate the oversupply of U.S. natgas markets and that would end up pummeling the Henry Hub price.”