Lower oil prices have recently placed increasing pressure on producers, with a significant number of companies filing for bankruptcy protection in 2015, including Magnum Hunter, Quicksilver, Sabine, and Samson. If oil and gas prices remain depressed, it is likely that more producers, such as Chesapeake and California Resources, will need to restructure their debt in 2016. Producers usually tend to hold out as long as possible during downturns, hoping others will cut production first and try to position themselves to outperform once the cycle turns. In the current “lower for longer” commodity cycle, many producers have already taken advantage of easy liquidity fixes (extending durations, second lien1 issuances, up-tiering2, etc.). With hedges rolling off, bankruptcy risk becomes a serious threat for weaker capital structures with unsustainable leverage.

Investors have started raising questions on midstream contract structures and the treatment of these contracts in Exploration & Production (“E&P”) bankruptcy proceedings given considerable stress emerging across the energy value chain. Furthermore, some midstream providers have received (and will receive in the future if the current commodity environment persists) requests for contract renegotiations and rejections as producers go through the restructuring process. Although midstream players are better positioned than E&Ps and oilfield service players given lower commodity exposure and longer contract duration, counterparty risk is emerging as an ongoing concern in the following areas: (i) underutilized energy infrastructure assets, (ii) contracted capacity on new pipelines, and (iii) future commitments on new projects.

While contract portfolios and negotiations can range widely, companies with diversified footprints, strong counterparties, and fee-based MVC contracts should be best positioned throughout the cycle. “Fee-based” is no longer the sole requirement for strong contract protections. Volume protections provide an additional layer of stability.

The AMP Capital Global Listed Infrastructure team has invested a considerable amount of time investigating the issues described in this paper (counterparty risk, stability of cash flows, balance sheet strength, funding requirements, etc.) and continues to focus on companies with the qualities to weather the downturn and thrive when the upcycle unfolds.

Read the full report here

Author: Antonio Barbera, Portfolio Manager / Analyst, AMP Capital

Important notice:The information contained in this document has been prepared by AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (AMP Capital) for providing general information only. It is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest in any particular investment fund or investment capability. Readers should not treat the Information as advice on legal, tax or investment matters and should make their own inquiries and consult professional advisers as to applicable laws, regulations and requirements in any particular jurisdiction (including, where the Information is received) and the consequences arising from any failure to comply. While every care has been taken in the preparation of this document, neither AMP Capital, nor any member of the AMP Limited Group makes any representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Certain information in this document identified by footnotes has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. Other than information sourced from AMP Capital, we have not independently verified this information and cannot assure you that it is accurate or complete. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investments decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. The Information may not be reproduced or redistributed (in whole or in part) or otherwise made available to any other person in any format without the express written consent of AMP Capital.

© Copyright 2016 AMP Capital Investors Limited. All rights reserved.