Prolonged weakness in oil prices could stoke merger and acquisition activity among master limited partnerships (MLPs), says Fitch Ratings.
The rating agency says that the sharp drop in oil prices is now leading to cuts in the 2015 capital spending budgets at exploration and production (E&P) companies. Cuts announced to date have ranged from 20% to more than 50%, it reports.
Fitch notes that a major focus of these cuts has been to U.S. shale projects, which have more flexible budgets, rather than big offshore projects. And, it says that MLPs have been key beneficiaries of the shale side of the sector, as they have built out shale-linked infrastructure projects.
Indeed, Fitch says that the strong demand for natural gas liquid (NGL) processing and logistic capacity has led to heavy backlogs of projects and high future projected capex. However, if lower oil prices are sustained, Fitch expects to see “meaningful declines in the backlog as all but the best projects are scaled back.” This could start to happen toward the end of 2015, it says.
Lower organic growth prospects for MLPs could, in turn, “trigger a wave of M&A in the industry, as MLPs seek to keep distribution growth high through acquisitions”, it says.