An oil and gas industry bust caused by the coronavirus pandemic is now beginning to spill over into the pipeline and storage tank business, a new report from the New York credit rating firm Moody's shows.
Moody's downgraded its outlook for the midstream sector, which includes pipeline and storage terminal operators, to negative from stable. The rating marks the first time that the firm has ever given a negative outlook for the midstream sector.
"Although midstream cash flow is largely insulated from the full brunt of commodity price and volumetric instability, the rapid pace and the magnitude of production declines have finally spilled into the midstream sector, compromising its aggregate credit quality," Moody's said.
Midstream: Oil glut makes storage a pricey commodity of its own
Record low oil prices caused by the coronavirus pandemic shutdowns and a price war between Russia and Saudi Arabia prompted exploration and production companies to slash their budgets while oil field service companies laid off tens of thousands of people.
The midstream sector put plans for several new pipeline projects on hold but earnings had largely been insulated from the industry downturn as oil companies sought to move and store crude until higher prices return.
Moody's now projects that oil production curtailments have been so sharp that pipeline and storage tank operators are now expected to see third earnings before income tax, depreciation and amortization fall by 5 percent this year.
Crude oil pipeline operators are expected to feel the most pain while interstate natural gas pipelines operate with regulated, fee-based contracts have little price or volume risk, Moody's reported.
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