Fitch Ratings has upgraded
Fitch has also upgraded
The upgrade and Stable Outlook reflect DCP's continued expected outperformance spurred by tailwinds from the elevated commodity price environment. The company remains focused on reducing leverage (measured as total debt with equity credit to operating EBITDA) which Fitch forecasts to range between 3.0x-3.3x in 2022 and 2023 before moderating to 3.6x-3.8x in the latter forecast years per the Fitch commodity price deck. DCP has a diverse asset footprint and customer base comprised of mostly investment grade customers. Offsetting these factors are DCP's volumetric risk and higher commodity price risk relative to midstream peers. Management maintains a hedging program to partially mitigate exposure to commodity price drops.
Key Rating Drivers
Scale and Scope of Operations: DCP's ratings reflect the size and scale, and diversity of its asset base. Also incorporated is its position as a large producer of natural gas liquids (NGLs) and processor of natural gas. The partnership has a robust operating presence in most of the key production regions within the
The size and breadth of DCP's operations allow it to offer its customers end-to-end gathering, processing, storage and transportation solutions, giving it a competitive advantage within the regions where they have significant scale. Excess capacity on several of DCP's systems provide opportunities for volume growth with incremental optimization expenses in higher margin regions to improve utilization.
Volumetric and Commodity Price Exposure: DCP's ratings reflect its exposure to volumetric and commodity price risks associated with the domestic production and demand for natural gas and NGLs. Approximately 50% of DCP's gross margin is provided from the logistics and marketing (L&M) segment, which generally provides fee-based cash flows with exposure to volumetric-risk.
Gathering and processing (G&P, approximately 50% of gross margin) contracts are largely backed by dedicated acreage and are a mix of non-commodity sensitive fee-based contracts and commodity sensitive percent-of-proceeds and percent-of-liquids contracts. DCP is expected to further benefit from its unhedged commodity-price exposure in 2H22, as higher commodity prices spur increasing production and DCP completes additional well connects in the
As of 1Q22 approximately 70% of gross margin is fee-based and DCP has hedged 13% of the remaining margin. The company has taken advantage of favorable pricing across associated hydrocarbons and added hedges that reduce its sensitivity to a large drop in prices. DCP's hedging program contributes to a steady cash flow profile but also exposes it to longer-term hedge roll-over and commodity price risks. The company is well hedged for each quarter in 2022.
Improving EBITDA Drives Leverage Decline: Fitch expects leverage to decline to a range between 3.0x-3.3x in 2022 and 2023 driven by improving G&P volumes in DCP's key DJ and
On the L&M side of the business DCP is benefitting from third-party shippers shifting into ethane recovery and is expected to see increased throughput in 2H22. As the Fitch price deck returns closer to mid-cycle leverage in the outer forecast years, leverage is expected to moderate to 3.6x-3.8x range.
Capital Allocation Strategy: Management has reached their targeted leverage metric per their bank covenant calculation as of 1Q22 LTM financials and is expected to continue to produce excess FCF throughout Fitch's forecast period. Modest growth capex is expected to continue to fund bolt-on opportunities in their G&P business in the DJ and Permian basin footprints. Incremental optimization and investment projects will be aimed at improving asset utilization and added connectivity to
Supportive Ownership: Fitch rates DCP on a standalone basis, with no explicit notching from its parent companies' ratings; however, the ratings reflect that its owners have been and are likely to remain supportive of its operating and credit profile. DCP's ultimate owners of its general partner,
Parent Subsidiary Linkage: There is a parent subsidiary relationship between DCP and
Derivation Summary
DCP's ratings are reflective of its favorable size, scale, geographic and business line diversity within the NGL production and transportation and natural gas G&P space. The ratings recognize that DCP has greater exposure to commodity prices than other midstream peers, with approximately 70% of gross margin supported by fixed-fee contracts. This commodity price exposure has been partially mitigated in the near term through DCP's use of hedges for its NGL, natural gas and crude oil price exposure, pushing the percentage of gross margin, either fixed-fee or hedged, up to 83% as of 1Q22. This helps DCP's cash flow stability, but exposes it to longer-term hedge roll-over and commodity price risks.
DCP is slightly smaller in terms of EBITDA generation but more geographically diversified than NGL focused midstream peer
Fitch expects DCP's leverage to be around 3.0x-3.3x through 2023. Targa's leverage should decline below 3.5x following redemption of the preferred shares. Both companies' leverage position them well within the 'BBB-' rating category.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Base case WTI oil price deck
Growth and sustainable capex in line with management's guidance;
Distribution increase expected in 2H22;
No significant acquisitions are included in the forecast;
Upcoming debt maturities to be repaid with FCF.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A demonstrated ability to maintain the percentage of fixed-fee or hedged gross margin at or above 80% while maintaining leverage (total debt with equity credit/operating EBITDA) below 3.5x for a sustained period could lead to a positive rating action;
Meaningful increase in scale.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Leverage expected above 4.5x on a sustained basis and may result in at least a one-notch downgrade;
A significant decline in fixed-fee or hedged commodity leading to gross margin less than 70% fixed fee or hedged without an appropriate significant adjustment in capital structure, specifically a reduction in leverage, would likely lead to at least a one-notch downgrade;
A significant change in the ownership support structure from GP owners ENB and PSX to the consolidated entity particularly with regard to the GP position on commodity price exposure, distribution policies and capital structure at DCP, the operating partnership.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: As of
Maturities are manageable. The nearest maturity is the
Issuer Profile
DCP is a midstream energy company that is a large producer and marketer of NGLs, and processor of natural gas with operations in the
Summary of Financial Adjustments
Fitch applies 50% equity credit to DCP's junior subordinated notes and 0% equity credit to DCP's existing preferred equity in Fitch's forecasts. Previously 50% equity credit was given to DCP's preferred units but due to lack of established permanence they now receive 0%. Fitch typically adjusts master limited partnership EBITDA to exclude equity interest in earnings from unconsolidated affiliates but includes cash distributions from unconsolidated affiliates.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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