What to Expect from Midstream Companies: Will They Recover?
Interest coverage ratio
After the FOMC’s (Federal Open Market Committee) meeting on October 28, the probability of a rate hike in December grew. Since October 28, midstream stock fell by 25% as of December 11—compared to flat large-cap downstream companies. However, large-cap upstream companies fell by ~20%.
Midstream companies’ average interest coverage ratio in fiscal 3Q15 was 3.58x—compared to 4.9x for large-cap upstream companies. Large-cap refiners maintained this ratio around 9x. Midstream companies are more likely to be impacted by the probable rate hike in December—compared to their downstream and upstream peers.
Growth in midstream’s debt
The total debt for Williams Companies (WMB) and Energy Transfer Equity (ETE) grew by 87% and 32%, respectively, on a YoY (year-over-year) basis in fiscal 3Q15.
However, some companies like Spectra Energy (SE) saw its debt fall by 0.25%. Kinder Morgan’s (KMI) debt only grew by 13% on a YoY basis in fiscal 3Q15. Kinder Morgan accounts for 2.5% of the Energy Select Sector SPDR Fund (XLE).
Spectra Energy Partners’ (SEP) debt only grew by 2%.
Weighted average cost of debt
The weighted average cost of debt for these midstream operators stood at 2.7% at the end of fiscal 3Q15. A fall in the demand for natural gas and crude made the rating agencies bearish on these companies’ stocks. If the current situation prevails, the midstream industry could experience stiffer rules and higher interest in order to raise the debt.
The above graph shows the midstream companies’ debt growth and the weighted average cost of debt. In fiscal 3Q15, the weighted average cost of debt for large-cap downstream and upstream companies was 2.9% and 2.5%, respectively.
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