The sharp drop in oil prices and announced revisions to E&P capex budgets should not impact MLP spending in the short run, but a sustained price drop could ramp up M&A activity in the space, Fitch Ratings said in a Jan. 14 release.
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, Fitch Ratings said.
Cuts announced to date include:
- ConocoPhillips Co. (NYSE: COP)—20%;
- Pioneer Natural Resources Co. (NYSE: PXD)—21%;
- Sanchez Energy Corp. (NYSE: SN)—30%;
- Concho Resources Inc. (NYSE: CXO)—33%;
- Oasis Petroleum Inc. (NYSE: OAS)—45%; and
- Linn Energy LLC (NASDAQ: LINE)—53%.
Fitch Ratings said 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 HBP), 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. Fitch Ratings said this strong need for 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, Fitch Ratings said. 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.
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