Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )
 December 10, 2015 - 3:30 PM EST
Print Email Article Font Down Font Up
Fitch: Dividend Cuts Possible but Unlikely for US Midstream Cos

A positive equity market response to cuts in dividends has the potential to make similar distribution cuts palatable to other U.S. midstream energy issuers in need of capital market funding options, according to Fitch Ratings. However, we do not believe that significant dividend and distribution cuts will be the norm for investment-grade midstream energy companies, as was the case with Kinder Morgan's (KMI) 75% cut.

Equity prices for midstream issuers are down because of lower equity prices, lower growth expectations, and a rotation out of energy investments. With the declines in equity, the issuers' abilities to access capital markets to fund growth spending with equity has become economically challenged, sending many issuers scrambling to find alternative sources of equity funding. KMI's announcement could encourage other midstream issuers to follow suit in cutting dividends or distributions, although at this point Fitch does not believe it is necessary for issuer to pursue cuts.

Fitch believes that the KMI dividend cut was generally positive for its credit profile. The cut alleviates the need for KMI to access equity markets and lessens the need for it to access debt markets to help fund what remains a large growth spending backlog. However, the issues facing KMI were relatively unique to KMI given its high leverage, and large backlogged growth spending budget. While there are other issuers facing similar situations their leverage metrics are generally a bit better and other equity funding alternatives are available.

Cuts in dividend or distribution growth rates may be a logical first step for issuers who are not under the same leverage pressures that KMI was facing and may not need as steep cuts. Other funding possibilities include asset sales, joint ventures, sponsor support, preferred equity, convertibles, or hybrid-subordinated debt. Fitch expects an "all of the above" pursuit of these options as issuers look to fund capital needs with whatever makes the most economic sense.

Ultimately Fitch believes issuers, particularly master limited partnership (MLP) issuers, will pursue a funding strategy that they believe offers the lowest available cost of capital. Issuers, especially the larger investment-grade rated midstream energy companies with growth capital funding needs, will move to defend investment ratings at the expense of dividends and distributions if necessary. For high yield names funding problems are currently much more pronounced, with equity markets essentially closed and bond spreads dramatically higher, although liquidity is generally acceptable with availability under revolvers adequate and existing debt maturities well spread out. Distribution cuts here could provide some funding access relief. Fitch would tend to view cuts in dividends and distributions resulting in higher distribution coverage and cash retention to fund capital needs as neutral to positive for credits.

Overall, Fitch has a negative sector and rating outlook for the U.S. Midstream Services sector for 2016. Continued low commodity prices, increased counterparty risk, potential volume declines, constricted capital market access, and rising leverage could lead to negative ratings actions or outlook changes within Fitch's midstream services coverage. Fitch expects that 2016 revenue and cash flow for oil and gas gathers and processors, in particular, will continue to exhibit weakness resulting from low prices and production volume declines. Fitch does believe that natural gas pipelines and crude oil and refined products pipelines should all be relatively stable for 2016 given the contractual support underpinning most operations.

For further insight on our expectations for the U.S. midstream sector, please see the following outlooks available on our website at www.fitchratings.com:

"2016 Outlook: U.S. Midstream Services"

"2016 Outlook: U.S. Crude Oil and Refined Products Pipelines"

"2016 Outlook: U.S. Natural Gas Pipelines"

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.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Peter Molica
Senior Director
Corporate Finance
+1 212-908-0288
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Kathleen Connelly
Director
Corporate Finance
+1 212-908-0290
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (December 10, 2015 - 3:30 PM EST)

News by QuoteMedia
www.quotemedia.com