Fitch Ratings believes rapid growth in Marcellus Shale natural gas production presents both opportunities and challenges for U.S. midstream and pipeline companies.
Increasing regional demand is expected to continue to spur dramatic production growth, despite low current natural gas prices and environmental concerns over hydraulic fracturing. Fitch Ratings also expects substantial new energy infrastructure will be required to gather, process, and ship natural gas and associated natural gas liquids (NGLs).
In a recent report, the company reviewed several Fitch-rated U.S. midstream and pipeline companies with significant exposure to the Marcellus and discussed various credit implications for each company based on a number of variables. Companies reviewed include Enterprise Products Partners LP, NiSource Inc., Spectra Energy, and Williams Partners L.P, among others.
Looking ahead, Fitch notes several key Marcellus Shale pipeline projects are underway, including both NGL and natural gas. In general, the company anticipates that project sponsors will benefit from the growth in the Marcellus as new infrastructure is put in place to move production to end user markets. Contracts for midstream and pipeline services are generally credit positive, master limited partnership-friendly, long-term, fee-based arrangements with minimal commodity price exposure. To date, the financing decisions made by sponsors to fund projects have also been balanced between debt and equity, and Fitch Ratings anticipates this will continue to be the case.
Still, the expansion in the Marcellus has had less supportive impacts on some sponsors’ credit profiles. Marcellus production competes with supplies from the Gulf, the Rockies, and other producing basins, meaning diminished capacity utilization on certain supply-driven pipelines, thus increasing recontracting risk for those systems. The company notes that in response to Marcellus activity, some companies have changed their business mix, ramping up exposure to higher volatility exploration and production (E&P) activity in the region versus lower volatility regulated businesses.
In addressing counterparty risks, we believe the relatively low breakeven prices associated with Marcellus production suggest that production would not be disrupted, even under scenarios of producer distress.
LNG World News Staff, July 13, 2012; Image: EIA