Strong credit quality and improved credit measures for North and South American (the Americas) midstream energy companies continued in 2023. The sector continues to benefit from strong demand, boosted by ongoing concerns about global energy security, and a cautious but constructive economic outlook.

S&P Global Ratings' industry outlook is stable, with most companies positioned to withstand near-term headwinds related to carbon emissions, stricter regulations related to infrastructure development, and shifting demand patterns over the long term. Companies have maintained significant financial flexibility, strong balance sheets, and limited reliance on capital markets for a sizable portion of their funding needs. Macroeconomic factors, such as stronger demand for refined products, crude oil, and natural gas, as well as supportive commodity prices, also contributed to our view.

The proportion of companies in the sector with a stable outlook is lower as of Feb. 14, 2024, at 74% compared to 80% in 2023. Negative outlooks are slightly higher, at 16% of the rated portfolio compared to about 13% a year ago. That said, the balance of the rated portfolio has positive momentum due to stronger creditworthiness and transaction activity.

Midstream energy companies continue to generate discretionary cash flow despite an uptick in growth capital spending, and companies are continuing to use this excess cash flow to strengthen balance sheets by paying off debt and returning money to shareholders. We expect these trends will continue and will boost credit quality. Our ratings are underpinned by our base-case assumptions but also factor in some headroom for short-term volatility related to volumes and longer-term cyclicality of commodity prices.

Our Rankings

The following list (Table 1) ranks the midstream energy companies based in the Americas that S&P Global Ratings rates, from strongest to weakest. We rank companies, in turn, by the rating, outlook, stand-alone credit profile (SACP), business and financial risk profiles, and liquidity assessment. We rank investment-grade companies by business risk profile (BRP), then financial risk profile (FRP). We rank speculative-grade companies by FRP, then BRP. If not distinguished by these factors, we list companies in alphabetical order.

In line with our rating methodology, the final rating may differ from the SACP, where government, group, or rating above the sovereign considerations apply. When the SACP differs from the anchor, we've applied one or more modifiers, which may include that for liquidity. We've noted the anchor and active modifiers of each company for informational purposes only.

The list also includes general partners and sponsor-backed holding companies that we rate under our Master Limited Partnerships And General Partnerships and Companies With Noncontrolling Equity Interests methodologies. We have also included midstream and liquified natural gas companies that we rate under our Project Finance Rating methodology. For detailed analysis, please refer to the company-specific pages on RatingsDirect via the hyperlinks in the table below.

Given our intermediate industry risk assessment for the midstream energy sector, country risk has no material impact on the corporate industry and country risk assessment (CICRA) because most of the rated companies are based in jurisdictions where we assess country risk as very low.

Group ownership is an explicit rating factor for 20 companies in the portfolio (about 18%). Our analysis of the ownership effect on issuer credit ratings is that it is a constraint on the SACP for about 2% of the companies, raises the SACP for 7%, and does not affect the rating for the remaining affiliates.

Table 1

Across the midstream portfolio, 39% of our ratings are investment grade. Ratings below 'BB+' in midstream energy account for approximately 61% of the portfolio. Out of all 110 entities, only two of the 43 investment-grade companies-- Boardwalk Pipeline Partners L.P. and LOOP LLC--receive uplift from stand-alone speculative-grade ratings due to group support.

Chart 1

Outlook And CreditWatch Distribution

Chart 2

Business Risk Profile Distribution

About 58% of our BRP assessments are satisfactory or better, which typically reflects significant size and scale, and a strong competitive position or contractual foundation. Lower BRP assessments typically reflect weaker competitive positions due to limited geographic footprint, significant commodity or volume risk, or less favorable contracts that could hurt cash flow in an economic downturn.

Chart 3

Cash Flow And Leverage Distribution

The midstream energy sector's FRP assessments are skewed to the higher-risk categories and tend to be weaker as ratings transition from investment to speculative grade, as one would expect. Highly leveraged, aggressive, and significant FRPs account for 78% of the rated universe, with the stronger intermediate financial risk category making up most of the rest.

The highly leveraged assessment accounts for 19% of rated issuers and typically reflects companies with stretched balanced sheets or sponsor-backed holding company loans. Intermediate and stronger assessments mostly reflect companies that have much lower stand-alone leverage than their owners and have SACPs that are generally constrained by the group credit profile.

Chart 4

Liquidity Distribution

We consider most issuers to have liquidity that is adequate or better. This is important because companies are self-funding their capital requirements, and don't have a need to issue equity as a major source of funding. Typically, the amount of cash flow that companies generate, combined with liquidity resources, will cover the uses of cash to which they have committed over the next 12 months by 1.2x or more.

Chart 5

Related Criteria

• Criteria | Corporates | General: Corporate Methodology, Jan. 7, 2024
• General Project Finance Rating Methodology, Dec. 14, 2022
• Methodology For Companies With Noncontrolling Equity Interests, Jan. 5, 2016
• Methodology: Master Limited Partnerships And General Partnerships, Sept. 22, 2014
• General Criteria: Group Rating Methodology, Nov. 19, 2013
• General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013