medium · Corporate Credit Analysis
A midstream energy company has $5.0B in net debt and $1.0B in EBITDA, largely driven by fee-based contracts with minimum volume commitments.
How should a credit analyst treat this compared to an upstream E&P peer with the same 5.0x leverage?
- Both companies would receive an identical credit rating simply because their leverage ratios are numerically the same.
- The midstream company is likely higher rated because its cash flows are more predictable and less sensitive to commodity prices.
- The midstream company is actually riskier because it depends entirely on the upstream producers for its throughput volume.
- The E&P company is higher rated because its proved reserves and hard assets provide superior collateral backing for its secured lenders.
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