Fitch: Continued Equity Price Weakness Could Effect MLP Funding

OREANDA-NEWS. Underperforming equity prices across the midstream space could negatively affect master limited partnership (MLP) funding, according to Fitch Ratings. Equity prices across the midstream space have weakened as falling commodity prices continue to weigh on midstream energy issuers. The Alerian MLP Index is down roughly 23% year to date through Aug. 11, 2015.

Equity prices remain suppressed and the ability and willingness to fund capital spending with equity is becoming a more prominent concern for midstream issuers. Access to capital markets remains intact despite the rising cost of capital. We believe access to markets could deteriorate as commodity and equity prices continue to languish and potential interest rate increases from the U.S. Federal Reserve loom.

Overall capital market access and cost of capital is a growing focus. A potential increase in the cost of capital would create higher hurdle rates for projects and acquisitions to be profitable and could result in projects being pushed out or canceled, although capital spending backlogs currently remain largely intact.

Year-to-date, market access has been robust with midstream issuers raising over $41 billion in capital through July 24, 2015, but with expected rate increases on the horizon debt market access could also contract.

Fitch expects the smaller, lower rated midstream and MLP names will be most affected in a rising cost of capital environment and market access issues could become a potential catalyst for merger and acquisition activity.

Ideal funding for midstream names is generally balanced between debt and equity issuance. The cost of equity in the midstream and MLP space has increased as unit prices have declined since the end of 2014, driving equity yields higher. With equity yields at or near multiyear highs the ability and willingness of issuers to fund capital needs with equity could be called into question. This would negatively affect leverage and potentially stress balance sheets as issuers borrow to meet funding needs.

Access to equity markets remains a prominent concern for midstream issuers, particularly MLPs looking to fund what remain rather robust growth backlogs. Other MLP issuers have at-the-market programs which can provide equity funding ability on an as-needed basis. Additionally, other alternatives are available to meet funding needs including asset sale, preferred or hybrid equity, slowing distribution growth, or retaining more cash in order to support funding needs.