Global Pipeline and Midstream Industry Outlook 2024: Energy exports to drive growth

2024 Outlook: Neutral

We view the outlook for the Pipeline and Midstream Sector to be neutral. We expect oil and gas prices to soften in 2024 (see our commentary Oil & Gas Outlook: Slowing Economies and War are Driving Prices and Could Potentially Impact Credit Risk Profiles in 2024, published January 17, 2024); however, we expect excess supply to primarily drive the softening. Consequently, we expect asset utilisation in the Sector to remain strong as rising energy exports drive up oil and gas production in North America. Additional tailwinds include consolidation among oil and gas producers, which should improve counterparty risk profiles, stabilising interest rates and moderating inflation.

Companies in the Sector have focused on deleveraging their balance sheets over the last couple of years, and we expect financial risk profiles to remain stable. The regulatory environment, especially for long-haul pipelines will continue to be challenging, but the Sector could make progress on new opportunities arising from energy transition initiatives. We also expect increased co-operation between the Sector and Indigenous groups in Canada through the sale of minority interests in existing and new projects.

Credit rating implications

We expect credit ratings in the Sector to be relatively stable and any changes in ratings to be primarily driven by Company-specific factors rather than Sector-specific issues. The Sector is characterised by contracted cash flows, which tend to be relatively stable and typically protected from short-term volatility in energy prices. Consequently rating changes in our portfolio over the last few years have been primarily driven by changes in financial policy, debt funded acquisitions or delays, and cost overruns at large projects rather than by a material reduction in earnings and cash flow.

Asset utilisation levels in North America were quite robust in 2023 as oil and gas production reached record highs in 2023, primarily driven by an increase in energy exports. The US has emerged as a key energy supplier to Europe post Russia's invasion of Ukraine. While production is starting to moderate on the back of softening global demand, we expect asset utilisation in the Sector in 2024 to remain high. Crude oil production in North America has benefitted from wells drilled in 2022 when prices were higher and could moderate in 2024. However, natural gas production is likely to grow further as the US is expected add four new liquefied natural gas (LNG) export terminals with an export capacity of approximately 7 billion ft³/d over the next two years.

The growth in energy exports is also providing future investment opportunities for the Sector, especially for natural gas pipeline transportation. According to the EIA estimates, approximately 20 billion ft³/d of pipeline capacity is under construction in the US to serve LNG export terminals. In Europe, the story is playing out in reverse. The continent is rapidly adding new LNG regasification facilities to replace natural gas imports from Russia. In 2022, Europe approved approximately 77 million tpy of new LNG regasification capacity of which 37 million tpy has started or will begin operations by the end of 2024.

Financial risk profiles expected to remain relatively stable

Companies in the sector typically tend to have reasonable risk management practices and typically have explicit leverage targets that act as guardrails. Over the last couple of years, companies have focused on deleveraging their balance sheets and have scaled back capital expenditure plans. As a result, apart from a few outliers, most companies in the Sector have seen their financial risk profiles improve over the time period. While there could be individual exceptions, we expect most companies in the Sector to continue to operate within or strive to reach their stated leverage targets.

We also expect the Sector to be fairly disciplined in its approach to capital investment and focus on projects that generate contracted cash flows. We also believe the ongoing wave of consolidation among oil and gas producers is a positive for the Sector. Most of the transactions were primarily equity funded and an as a result, we expect counterparty credit profiles to improve. We also note that cost inflation is moderating, and while interest rates remain high, the spectre of additional interest rate increases is receding. That said, if interest rates remain at current levels for a longer period, this could have an impact on the credit profiles of lower-rated borrowers when they go to refinance maturing debt.

Investment in low carbon business expected to accelerate

Increasing regulatory scrutiny, recognition that fossil fuel consumption, especially in North America and Europe, will decline at some point over the next couple of decades and financial support from governments for energy transition projects will push the Sector to increase investment in low-carbon businesses (see our commentary Evaluating the Credit Impact of Low-Carbon Alternatives on Pipeline and Midstream Energy Companies, published December 5, 2023). In North America we expect the Sector to place an emphasis on carbon capture, utilisation, and storage (CCUS) and projects. The technical expertise gained by companies in the Sector through their existing pipeline businesses can be translated to the CCUS domain. Furthermore, the Sector is accustomed to executing large, complex projects. In Europe, the focus of the Sector is likely to be on Hydrogen with the proposed development of the European Hydrogen Backbone. This initiative is likely to provide the Sector in Europe with an opportunity to convert its existing natural gas pipeline infrastructure (with modifications) to transport hydrogen as well as build new pipeline infrastructure.

We expect the trend of financial participation from Indigenous groups in major midstream and pipeline projects to continue to gather momentum as companies look to gain social licence from the communities where projects are located. We view this development as a positive for the Sector as improved community relations should address some of the regulatory concerns that large projects face at the approval stage.

Indigenous groups have already expressed an interest in acquiring a stake in the Trans Mountain Pipeline project, and TC Energy Corp. has applied for regulatory approval for a potential minority interest sale of its Nova Gas Transmission Ltd. System, which will likely attract Indigenous group participation. Financing for incremental stake sales will likely be provided by provincial loan guarantee programmes that are already in place. The process could hasten if the Indigenous loan guarantee programme promised by the federal government includes oil and gas projects. Even if oil and gas projects are excluded from the federal programme, we expect partnership between the Sector and Indigenous groups to strengthen through participation in energy transition projects.

Read the article online at: https://www.worldpipelines.com/business-news/30012024/global-pipeline-and-midstream-industry-outlook-2024-energy-exports-to-drive-growth/