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Related Issuers
Rating Action:

Moody's assigns Baa3 rating to Gray Oak Pipeline's proposed notes

09 Sep 2020

New York, September 09, 2020 -- Moody's Investors Service, ("Moody's") assigned a first time rating of Baa3 to Gray Oak Pipeline, LLC's (Gray Oak) proposed senior unsecured notes. Gray Oak will use the proceeds of the notes offering to refinance its existing term loan that partially financed the construction of its 850 mile crude oil pipeline that commenced full service in the second quarter 2020. The outlook is stable.

"Gray Oak Pipeline is refinancing its term loan to maintain long-term debt in its capital structure," said James Wilkins, Moody's Vice President. "The company will have ample revenue sourced from seven year contracts with minimum volume commitments and generate positive free cash flow."

The following summarizes the ratings activity.

Assignments:

..Issuer: Gray Oak Pipeline, LLC

....Senior Unsecured Notes, Assigned Baa3

Outlook Actions:

..Issuer: Gray Oak Pipeline, LLC

....Outlook, Assigned Stable

RATINGS RATIONALE

Gray Oak's Baa3 rating reflects its stable cash flows underpinned by multi-year contracts that have ship-or-pay provisions (minimum volume commitments, MVCs) covering over 800 thousand barrels per day of crude oil capacity in 2020. The majority of contractual commitments with its 18 shippers are with investment grade rated entities. The pipeline services the Permian and Eagle Ford basins, which are very competitive US shale basins with low breakeven oil prices and could support E&P investments even as other regions lose development capital. The pipeline delivers crude oil to Ingleside, Corpus Christi and Sweeny on the Gulf Coast as well as the Three Rivers area, where there is ample refining capacity and export terminals to process the Gray Oak volumes, and represent an alternative to the Houston and Nederland markets. The company will initially have leverage typical of a Ba-rated entity (which Moody's expects to improve with a full year of operations and as volumes begin to exceed MVCs), modest scale as measured by EBITDA and a concentrated asset base (one pipeline system) that does not provide for diversity of cash flow.

Gray Oak Pipeline has adequate liquidity supported by steady monthly revenue from shippers that will exceed its operating costs and low maintenance capital expenditures. The completion of the Zena Lateral is being funded by contributions from its owners. We expect the company to regularly distribute excess cash to its owners, thereby limiting any material build up in cash. The company does not have a revolving credit facility, nor is it subject to any maintenance financial covenants. (Moody's expects the credit facility under which the term loan was borrowed to finance construction of the pipeline to be terminated following the debt refinancing as will the equity support agreement from Gray Oak's owners.) Gray Oak does not have any near-term debt maturities.

The stable outlook reflects Moody's expectation that long-term contracts with MVCs and long-term interest on the part of exploration and production companies in developing the Permian Basin's crude oil assets will support steady cash flow generation.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The rating could be upgraded if leverage approaches 3.5x, shipping volumes exceed 900 Mbpd, and there is an improvement in the average credit quality of shippers. The rating could be downgraded if leverage exceeds 5x, there is a decline in the average credit quality of shippers, the average remaining contract life declines to less than three years, or there is a suspension in operations.

Gray Oak Pipeline, LLC owns a 850 mile, 1 MMbpd crude oil pipeline spanning from the Permian Basin and Eagle Ford Basin to the Texas gulf coast (Corpus Christi, Ingleside, and Sweeny), where the crude oil can be processed by refineries or exported to global markets. Gray Oak is owned by Phillips 66 Partners LP (42.25%), Marathon Petroleum Corporation (25%), Enbridge Inc. (22.75%) and Rattler Midstream LP (10%). Phillips 66 Pipeline, a subsidiary of Phillips 66, is the operator of the pipeline.

The principal methodology used in these ratings was Midstream Energy published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

James Wilkins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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​
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