DCP Midstream L.P. Outlook Revised To Negative From Stable On Lower Commodity Price Forecast; Ratings Affirmed

  • Given lower forecast commodity prices, we now expect DCP Midstream L.P.'s (DCP) cash flows to be weaker over the next few years because of both direct commodity exposure and volumetric exposure, particularly considering the dedicated acreage contracts in its gathering and processing segment.
  • We now expect credit metrics to be stressed for the rating, but the financial stress is offset to a degree by the company's robust cost-cutting plan, which includes a sharp reduction in capital expenditures (capex) and distributions.
  • S&P Global Ratings is revising the outlook to negative from stable. At the same time, we are affirming the 'BB+' issuer credit rating on the company, the 'BB+' rating on its senior unsecured debt, the 'BB-' rating on its junior subordinated notes, and the 'B+' rating on its preferred stock.
  • The negative outlook reflects higher adjusted leverage over the next few years because we expect debt to EBITDA to be over 5x in 2020, and gradually decrease to the 4.75x-5x range in 2021 as commodity prices improve in our forecast.
NEW YORK (S&P Global Ratings) March 27, 2020—S&P Global Ratings today took the rating actions listed above.
We revised our financial forecast to include our recently lowered commodity price assumptions, leading to EBITDA that is materially lower than previously expected over the next two years.  Generally speaking, DCP has more direct commodity exposure than the peer group. In 2020, about 70% of its margins are generated from fixed-fee contracts and another 9% of margin is hedged, leaving the balance of 21% directly exposed to commodity prices. In 2021, about 23% of margin is exposed to commodity prices considering a slightly lower hedge level. As a result, the lower price projections have an immediate and material negative impact on expected cash flows.
The negative outlook reflects our view that adjusted debt leverage at the partnership will be over 5x in 2020. We expect the partnership to reduce its cash uses over the next 12-18 months in order to moderate leverage and support liquidity, however we expect credit metrics will remain elevated over the next year.
We could downgrade the company if leverage remains above 5x. This could happen due to weaker than expected volumes and cash flows. We could also downgrade the partnership if liquidity deteriorates, especially considering our expectation for limited covenant headroom.
We could revise the outlook to stable if the company is able to moderate leverage such that debt/EBITDA falls below
5x and remains in that range on a sustained basis in our forecast. This would likely occur if the company is able to retain cash to both moderate its debt and refinance its September 2021 maturity.
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