Infrastructure needs will drive significant increases in capex spending by both master limited partnerships (MLPs) and C-Corps focused on midstream energy over the remainder of 2014 and into 2015, according to a Fitch Ratings report. Fitch projects MLP and C-Corp capex will increase 25 – 30% in 2014 over 2013 levels.
Low interest rates and current commodity prices support C-Corp and MLP spending over the near term. For entities focused on midstream energy, Fitch believes these factors combined with significant natural gas and crude oil production in domestic shale plays will drive growth.
Recent spending on capex for organic growth has historically outpaced acquisitions. MLPs have directed a larger percentage of total spending on acquisitions than C-Corps, which tend to have a higher cost of capital. Over the last six years, an average of 66% of total MLP spending has been on organic and maintenance capex, while C-Corps directed 82% of all spending on capex. Fitch notes, however, that acquisition activity remains an important sector growth strategy.
From a credit perspective, higher capex can result in increased leverage metrics during construction phases. However, Fitch evaluates this with a longer-term perspective, particularly if a project or projects are backed by long-term contracts with financially sound counterparties. Provided long-term arrangements exist, spending for new significant assets can be viewed as a credit positive.
Fitch’s analysis is based on a sample of issuers in its midstream ratings portfolio that it views as an indicator of trends in this space.
Article continues below this message
Have your opinion heard with Shale Gas International
We accept interesting, well-written opinion and analysis articles of up to 1,500 words, that offer unique insights into the shale industry. The articles cannot be overtly promotional in nature and need to fit into at least one of our content categories.
If accepted, the article must be exclusive to Shale Gas International website and cannot appear on any other websites, publications, etc. Each article may contain up to three links to external websites relevant to the content discussed in the piece.
If you would like to contribute to Shale Gas International website, please contact us at: editor[at]mw-ep.com