Energy

Question 1

APACHE CORPORATION (APA)

Answer 1

Apache is an independent energy company engaged in the exploration and production of oil and natural gas. It has a diversified portfolio with operations in the U.S., Egypt, and the North Sea. Strengths: Diversified geographic presence and solid credit metrics. Weaknesses: Exposure to geopolitical risks and fluctuating commodity prices.

Assets are a combination of Permian, Eqypt, and North Sea, with a relatively short reserve life. Offshore Suriname provides upside. The all-stock Callon acquisition (closed April 1st) will increase leverage modestly as Callon is higher levered at 1.4X, but overall is modestly credit positive. FCF will go to shareholders / debtholders on a 60/40 split. Positively, on its 1Q24 earnings call, management said it was a good market for divestitures and proceeds would be used to reduce debt to where “we are kind of a solid BBB type of rating.” APA has announced an exchange for old Apache Corp opco bonds for holdco APA Corp bonds. This will move bonds closer to Suriname assets, but with weaker post 2017 indenture covenants. Could also impact liquidity and index eligibility. Asset composition, capital structure complexity, and some weak CoC covenant language on post 2017-issued bonds warrant a discount to IG peers.

BBB3/BB+(Pos)/BBB-
Independent - Americas
$3.83bn in index across 7 issues

Question 2

CANADIAN NATURAL RESOURCES LTD (CNQCN)

Answer 2

Canadian Natural Resources is one of the largest independent crude oil and natural gas producers in the world, with a focus on cost-effective development. Strengths: Strong operational efficiency and large reserve base. Weaknesses: Exposure to regulatory changes and environmental concerns.

Long reserve life and slow production decline of oil sands assets offsets the lower margin nature of oil sands production. Weakened its net debt target to C$10B from C$8B, which it reached in 4Q23, and will now allocate 100% of FCF to shareholders vs prior guidance of 80-100%. CNQ remains highly sensitive to commodity price volatility, which along with the ESG overhang result in spread concession vs peers. Bonds appear fully valued at current spreads

Baa1/BBB-
Independent - Americas
$5.55bn in index across 9 issues

Question 3

CIVITAS RESOURCES INC (CIVI)

Answer 3

Independent oil and natural gas producer with operations in the Denver-Julesburg and Permian basins. Their business model emphasizes capital discipline, sustainable cash flow generation, and strong shareholder returns. Financially, Civitas Resources focuses on maintaining a strong balance sheet and delivering consistent cash returns to shareholders.

Ba3(Pos)BB-(Pos)/BB+
Independent - Americas
$4.10bn in index across 4 issues

Question 4

CONOCOPHILLIPS (COP)

Answer 4

ConocoPhillips is a global energy company specializing in the exploration and production of oil and natural gas. It is known for its strong operational performance and strategic asset portfolio. Strengths: Strong financial position and diversified asset base. Weaknesses: Exposure to commodity price volatility and significant capital expenditure. Second highest quality name in independent

Diversified asset profile more similar to large Integrateds and commitment to balance sheet support tight trading levels. $15B debt target implies ~3BB of debt reduction likely via scheduled maturities, with most FCF going to shareholders. The $3B purchase of the remaining 50% of the Surmont oil sands project is modestly leveraging, as will be the all-stock purchase of Marathon given its higher 1.2X leverage, but COP remains solidly positioned in its ratings with strong credit metrics. Willow project will increase Arctic production in medium term, creating ESG issues

A2/A-/A
Independent - Americas
$15.02bn in index across 20 issues

Question 5

CONTINENTAL RESOURCES INC (CLR)

Answer 5

Continental Resources is a leading oil and natural gas exploration and production company, primarily operating in the Bakken and STACK regions. It is known for its low-cost production and significant reserves. Strengths: Strong production growth and low-cost operations. Weaknesses: High exposure to volatile oil prices and significant capital expenditure requirements.

CLR was taken private in 4Q22 and leverage has remained relatively stable. Net Debt/EBITDA was 0.87X at 2Q24 vs 1.12x in YE2022. Free cash flow should support a debt maturity in 2026 and moderate level of CapEx. No major acquisitions are currently expected. Longer duration bonds should trade at something of a discount, given CLR operates in the more mature Bakken and Anadarko basins.

Baa3/BBB-/BBB
Independent - Americas
$4.80bn in index across 5 issues ($3.10bn 144a)

Question 6

DEVON ENERGY CORPORATION (DVN)

Answer 6

Devon Energy is an independent oil and natural gas exploration and production company, primarily operating in the U.S. It focuses on high-return projects and efficient operations. Strengths: Strong balance sheet and disciplined capital allocation. Weaknesses: Dependence on U.S. shale plays and exposure to commodity price fluctuations.

Devon has also been acquisitive, most recently the $5B purchase of Grayson Mills Energy in the Williston during 3Q24, which was funded 35% equity/65% debt and increases proforma leverage to 1X from 0.7X. Intends to direct 70% of free cash flow to shareholders via their fixed+variable dividend structure and share repurchase program. Having said that, they intend to reduce debt via $2.5B of upcoming maturities and call dates. Devon’s reserve life of ~8 years means they will likely remain acquisitive to replenish well inventory, as they have been outbid in many recent transactions.

Baa2/BBB/BBB+
Independent - Americas
$5.55bn in index across 9 issues

Question 7

DIAMONDBACK ENERGY INC (FANG)

Answer 7

Diamondback Energy is an independent oil and natural gas company focused on the acquisition, development, and exploration of unconventional oil and natural gas reserves in the Permian Basin. Strengths: High-quality asset base and strong production growth. Weaknesses: High capital expenditure and exposure to oil price volatility. Third highest quality name in Independent

Permian pure-play with high quality assets. Has remained acquisitive, most recently the $26B Endeavor Energy purchase which increases production ~70% (closed Sept 10). The $7.1B cash component should not materially increase FANG leverage, as Endeavor was under-levered. Positively, mgmt will reduce the allocation of FCF to shareholders from 75% to 50%, with a goal of reducing debt to $10B by YE25. This followed two transactions closed in 4Q22 and 1Q23 that total ~$3B, funded about equally with debt and equity. While only in one basin, the increased size and scale along with strong balance sheet could result in upgrades to mid BBB. Continued acquisitive nature and serial funding of transactions should result in a bit of concession

Baa2/BBB- *+/BBB- *+
Independent - Americas
$11.24bn in index across 12 issues

Question 8

EOG RESOURCES INC (EOG)

Answer 8

EOG Resources is a major player in the oil and gas industry, focusing on the exploration and production of crude oil and natural gas. It is distinguished by its technological innovation and efficient operations. Strengths: Strong balance sheet and high operational efficiency. Weaknesses: Dependence on commodity prices and potential regulatory risks. Highest quality name in Independent

Strong credit metrics, with more cash than outstanding debt for the last six quarters. Defensive name that could become more attractive if oil prices continue to moderate. Tends to underperform peers in strong commodity price environments. Better opportunities elsewhere in the sector.

A3/A-
Independent - Americas
$2.75bn in index across 4 issues

Question 9

HESS CORP (HES)

Answer 9

Hess Corporation is a global independent energy company engaged in the exploration and production of crude oil and natural gas. It has a balanced portfolio with significant offshore operations. Strengths: Strong operational performance and diversified asset base. Weaknesses: High capital intensity and exposure to geopolitical risks.

Hess credit profile turns on whether the acquisition by Chevron is completed or terminated due to Exxon trying to execute a right of first refusal on Hess’s 30% stake in their Guyana joint venture. While the JV agreement is private, it would appear Chevron/Hess have a strong position in the dispute, while current levels would indicate about a 50% probability of the deal closing. The FTC has approved the merger but the arbitration panel that will resolve the dispute is scheduled for May 2025, with a decision expected within three months after. Should Hess remain independent and retain its Guyana asset, leverage would come down gradually toward peer metrics due to increasing free cash flow from Guyana. Standalone Hess without its Guyana assets would likely result in debt tenders with sales proceeds, with remaining debt outstanding potentially falling to HY due to reduced size/scale

Baa3 *+/BBB- *+/BBB *+
Independent - Americas
$5.14bn in index across 7 issues

Question 10

MARATHON OIL CORP (MRO)

Answer 10

Marathon Oil is an independent exploration and production company with operations in the U.S. and internationally. It focuses on high-return U.S. resource plays. Strengths: Strong cash flow generation and investment-grade credit ratings. Weaknesses: Exposure to commodity price fluctuations and high capital intensity.

Being acquired by ConocoPhillips in an all-stock transaction

Baa3 *+/BBB- *-/BBB- *-
Independent - Americas
$4.00bn in index across 6 issues

Question 11

OCCIDENTAL PETROLEUM CORPORATION (OXY)

Answer 11

Occidental is a multinational energy company with operations in the U.S., Middle East, and Latin America. It focuses on oil and gas exploration and production, as well as chemical manufacturing. Strengths: Strong asset base and significant production capabilities. Weaknesses: High debt levels and integration risks from acquisitions.

The $12B acquisition of CrownRock increased debt by $10.3B and leverage a half turn to ~1.8X, and closed on Aug 1st. OXY intends to divest $4.5-$6B of assets and reduce gross debt by at least $4.5B within 12 months and is maintaining their $15B gross debt target. The purchase poses risks similar to the Anadarko transaction if commodity prices fall, as leverage could approach 4X at $55 oil. Having said that, if they execute as intended their size, diversification and intended capital structure will warrant upgrades to mid/high BBB in the intermediate term. Berkshire Hathaway stake in common equity is now 28.8% vs at 25% six months ago. Current levels look unattractive given a moderating outlook for oil prices.

Baa3/BB+/BBB-
Independent - Americas
$17.54bn in index across 21 issues

Question 12

OVINTIV INC (OVV)

Answer 12

Ovintiv is an independent energy producer with a focus on oil and natural gas exploration and production in North America. It emphasizes operational efficiency and technological innovation. Strengths: Strong operational efficiency and diversified asset base. Weaknesses: Exposure to commodity price volatility and high capital expenditure.

Leverage increasing to 1.4X fro 0.8X due to $4.25B cash aquisition of three Permian companies in 2Q23, offset by sale of Bakken asset for $825M. Mgmt intends to reduce debt to $4B from $6.5B via 50/50 split of FCF between debt and equity holders, which intent of achieving 1X leverage target in 2-3 years. Debt reduction to date has been modest/disappointing. Management reiterated their intent to begin paying down debt, but shareholder returns are taking priority. There were rumors in August they may sell their Uinta basin assets in Utah which could bring proceeds of $2B and accelerate debt reduction, as well as rumors early October than Coterra Energy was interested in buying Ovintiv. While increased Permian exposure is positive, OVV remains skewed to lower margin natural gas, so trades at a discount vs oilier peers. May 2023 bond offerings added needed liquidity to the capital structure.

Baa3/BBB-/BBB-
Independent - Americas
$4.79bn in index across 10 issues

Question 13

PERMIAN RESOURCES OPERATING LLC (PR)

Answer 13

Independent oil and natural gas company focused on the acquisition, optimization, and development of high-return properties in the Permian Basin. Leverages its technical expertise and operational flexibility to maximize returns from its core assets in the Delaware Basin. Focus on high-return assets and operational efficiency enhances its creditworthiness. Concentration in the Permian Basin.

Rising star candidate

Ba3(Pos)/BB/BB+
Independent - Americas
$4.34bn in index across 7 issues

Question 14

PIONEER NATURAL RESOURCES COMPANY (PXD)

Answer 14

Pioneer is a leading independent oil and gas exploration and production company, primarily operating in the Permian Basin. It is known for its large, high-quality asset base. Strengths: Strong free cash flow and robust balance sheet. Weaknesses: High capital expenditure and exposure to oil price volatility.

Acquired
Independent - Americas
$3.95bn in index across 4 issues

Question 15

SM ENERGY CO (SM)

Answer 15

Independent energy company focused on the exploration, development, and production of natural gas and crude oil in the U.S. Their business model includes a strong emphasis on operational efficiency and strategic asset management. Financially, SM Energy benefits from a robust portfolio of high-quality assets and a disciplined approach to capital allocation.

Ba3/BB-/BB- *+
Independent - Americas
$2.74bn in index across 5 issues

Question 16

SOUTHWESTERN ENERGY COMPANY (SWN)

Answer 16

Independent energy company engaged in the exploration, development, and production of natural gas, oil, and natural gas liquids in the United States.Two segments: Exploration and Production, and Marketing, with a significant presence in the Appalachian Basin.

Rising star candidate

Ba1/BBB-/BBB-
Independent - Americas
$3.35bn in index across 4 issues

Question 17

VITAL ENERGY INC (VTLE)

Answer 17

Focuses on the acquisition, exploration, and development of oil and natural gas properties in the Permian Basin. Their business model emphasizes innovation and sustainability in energy production. Financially, Vital Energy benefits from strong production growth and strategic acquisitions that enhance their asset base.

B1/B(Pos)
Independent - Americas
$1.60bn in index across 3 issues

Question 18

HARBOUR ENERGY PLC (HBRLN)

Answer 18

Independent oil and gas company involved in the acquisition, exploration, development, and production of oil and gas reserves. Holds interests in properties located in the United Kingdom, Norwegian Continental Shelves, Indonesia, Vietnam, and Mexico, positioning itself as a significant player in the global energy market.

Rising star candidate

Baa2/BBB-/BBB-
Independent - Europe
$0.50bn in index across 1 issues

Question 19

SANTOS FINANCE LTD. (STOAU)

Answer 19

Santos is an Australian energy company engaged in the exploration, development, and production of oil and natural gas. It has a strong presence in Australia and Asia. Strengths: Strong regional presence and diversified asset portfolio. Weaknesses: Exposure to regulatory changes and environmental concerns.

Baa3/BBB-/BBB
Independent - Other Developed
$1.85bn in index across 2 issues ($1.85bn 144a)

Question 20

CHEVRON CORP (CVX)

Answer 20

Chevron is a major integrated energy company with operations spanning the entire oil and gas value chain, including exploration, production, refining, and marketing. It is known for its strong operational efficiency and strategic investments in renewable energy. Strengths: Strong financial position and diversified asset base. Weaknesses: Exposure to commodity price fluctuations and significant capital expenditure. Highest quality integrated name

Defensive USD only issuer with limited spread upside. Maintains a strong balance sheet wich supports its credit profile as well as high dividend payout. Cost overruns in Australian LNG and Kazakhstan operations are pressuring margins. Remains acquisitive (e.g. Hess, PDC Energy), but tends to do all-stock deals. Completion of Hess acquisition will likely be decided via arbitration and/or continued negotiation with Exxon and CNOOC.

Aa2/AA-
Integrated - Americas
$10.56bn in index across 12 issues

Question 21

EXXON MOBIL CORP (XOM)

Answer 21

Exxon Mobil is a global leader in the oil and gas industry, engaged in the exploration, production, and distribution of oil, natural gas, and petroleum products. It is distinguished by its extensive global operations and significant investments in technology and innovation. Strengths: Strong cash flow generation and a robust balance sheet. Weaknesses: High exposure to volatile oil prices and regulatory risks. Second highest integrated name

The acquisition of PXD for $59.5B in an all-stock transaction clsed in early May. Leverage is currently low and stable with Net Debt/EBITDA at 0.24x at the end of 2023 vs 0.19x in 2022. Continuing to target high cash balances ($31.5B at the end of 2023), but also planning to repurchase up to $20B of shares annually through 2025. CapEx guidance calls for $22-27B annually through 2027. While activist shareholders continue to push for less spending, slower growth, and more energy transition focus (which would be credit positive), they seem to have had less influence in the higher commodity price environment of the last year

Aa2/AA-
Integrated - Americas
$23.00bn in index across 13 issues

Question 22

SUNCOR ENERGY INC (SUCN)

Answer 22

Suncor is a Canadian integrated energy company focused on the development of petroleum resources, particularly oil sands. It differentiates itself through its integrated business model and commitment to sustainability. Strengths: Stable cash flow from integrated operations and strong market position in oil sands. Weaknesses: High capital intensity and environmental concerns related to oil sands.

Spreads more in line with mid-BBB Independent E&P, given heavy upstream oil sands focus and more limited downstream presence. In May they weakened their net debt floor/target to C$8B from C$5B. They will likely reach the new target in the next 3 to 9 months, after which distributions to shareholders will increase to 100% from 75% currently. New CEO focused on costs, improving safety, and better better operating results/up-time in its oil sands assets. Could remain acquisitive to replace Base Mine volumes which will be depleted in ~2035.

Baa1/BBB(Neg)/BBB+
Integrated - Americas
$5.30bn in index across 7 issues

Question 23

BG ENERGY CAPITAL PLC (RDSALN)

Answer 23

BG Energy Capital, now part of Shell, was primarily involved in the issuance of debt securities to support its parent company’s operations. It played a crucial role in financing BG Group’s activities before the acquisition by Shell. Strengths: Strong backing from Shell and access to capital markets. Weaknesses: Integration risks and reliance on parent company’s performance.

Aa2/A+/AA-
Integrated - Europe
$25.75bn in index across 17 issues

Question 24

BP CAPITAL MARKETS BV (BPLN)

Answer 24

BP Capital Markets BV is a financing arm of BP, responsible for issuing debt securities to support BP’s global operations. It benefits from BP’s strong credit rating and diversified energy portfolio. Strengths: Strong credit rating and access to diverse funding sources. Weaknesses: Exposure to regulatory changes and environmental liabilities.

Similar to peers, trajectory of credit profile improvement has flattened as they hit their $35B net debt target mid 2022, with shift of free cash flow toward shareholders. Now targeting 80% of surplus free cash flow to shareholders vs prior 60%, but subject to maintaining an A rating profile. Notably received upgrades to high single A by Fitch in Nov. 23 and Moody’s on March 26th. Conversely, S&P moved to stable outlook from positive in June due to the revised 80% allocation to shareholders and less debt reduction. Slowing the decline in legacy hydrocarbons production due to higher commodity prices and energy security considerations, while maintaining their energy transition investment goals/priorities. Still provides incremental spread vs large Integrated peers due to higher leverage, Has greater diversification than similarly/lower rated comps

A1/A-/A+
Integrated - Europe
$35.34bn in index across 28 issues

Question 25

ENI SPA (ENIIM)

Answer 25

Eni is an Italian multinational oil and gas company with operations in exploration, production, refining, and marketing. It is known for its strong presence in Europe and Africa and its commitment to sustainability. Strengths: Strong operational performance and diversified asset base. Weaknesses: Exposure to geopolitical risks and fluctuating commodity prices.

Good overall execution on upstream and transition initiatives, but less diversified than peers. Debt/cap has increased to 20% from 10% and into their 15-25% target range, with leverage metrics that are higher than integrated peers. Raised target return of CFFO to shareholders to 30-35% from prior 25-30%. Italian govt owns 30%, driving one notch lower rating at Moody’s. In 1Q24 closed on purchase of Neptune Energy’s gas assets for $2.6B which complements ENI’s assets/strategy, while Neptune’s Norwegian assets will be bought for $2.3B by Var Energi, in which ENI holds a 65% stake. Also sold a 9% stake in Plenitude, its renewable subsidiary, which could result in a further sale/IPO of the unit. Looks rich at 10bps behind BP.

Baa1/A-(Neg)/A-
Integrated - Europe
$5.00bn in index across 6 issues ($4.60bn 144a)

Question 26

EQUINOR ASA (EQNR)

Answer 26

Equinor, formerly known as Statoil, is a Norwegian energy company focused on oil, gas, and renewable energy. It is recognized for its strong commitment to sustainability and innovation in the energy transition. Strengths: Strong financial position and leadership in renewable energy. Weaknesses: Exposure to volatile oil prices and high capital expenditure.

Norwegian state ownership supports credit profile, with two notches of rating uplift at Moody’s. Natural gas prices have normalized from the windfall levels experienced in 2022, although the flexible tax regime limited that benefit. Investments in wind power and supportive state sponsor position company well for energy transition.

Aa2/AA-
Integrated - Europe
$0.50bn in index across 1 issues ($0.50bn 144a)

Question 27

Shell Plc (RDSALN)

Answer 27

Multinational oil and gas company involved in the exploration, production, refining, and marketing of oil and natural gas. Operates a vast network of refineries and chemical plants globally, positioning itself as a leader in the energy sector with a strong focus on sustainability and renewable energy initiatives. Integrated business model and significant investments in cleaner energy solutions. Third highest quality integrated name

With net debt at $37B, continues to direct 30-40% of cash flow to shareholders via dividends and shareholders vs. prior 20-30% target. Current commodity prices support this level of payout, with any meaningful excess flowing to further modest debt reduction and the already large $38B cash balance. Overall credit profile is stable and well protected, with financial flexibility to fund their energy transition initiatives. Investing to maintain flat overall fossil fuel output (vs. prior 1.5%/yr decline), and stricter return hurdles on clean energy capex

Aa2/A+/AA-
Integrated - Europe
$25.75bn in index across 17 issues

Question 28

TOTALENERGIES SE (TTEFP)

Answer 28

TotalEnergies is a French multinational integrated energy company with operations in oil, natural gas, and renewables. It is distinguished by its strategic focus on the energy transition and investments in renewable energy. Strengths: Strong balance sheet and diversified energy portfolio. Weaknesses: Exposure to regulatory changes and significant capital expenditure.

Increased target shareholder payout to >40% of CFFO from 35-40% of cash flow to shareholders, and dividend burden is higher than peers as the company chose not to reduce it during the pandemic. Having said that, the cash flow profile can support energy transition initiatives, where Total has a lead vs peers. Seems fully valued at levels on top of Shell

A3(Pos)/A-/A
Integrated - Europe
$12.85bn in index across 10 issues

Question 29

ANTERO MIDSTREAM PARTNERS LP (AM)

Answer 29

Midstream energy infrastructure in the Appalachian Basin, including gathering pipelines, compression facilities, and water handling systems. Supports the production activities of Antero Resources Corporation, providing critical midstream services that facilitate the transport and processing of natural gas and natural gas liquids. Strategic assets in the Appalachian Basin and strong relationship with Antero Resources enhance its creditworthiness.Geographic concentration risks.

Rising star candidate

Ba3/BB+
Midstream - Americas
$2.65bn in index across 4 issues

Question 30

BOARDWALK PIPELINES LP (BWP)

Answer 30

Master limited partnership that provides interstate transportation and storage of natural gas and natural gas liquids. It operates a network of pipelines primarily in the Gulf Coast region, offering essential infrastructure for energy distribution. Strengths: Stable cash flows from long-term contracts and strategic positioning in key energy markets. Weaknesses: Exposure to regulatory changes and fluctuations in natural gas demand can impact revenue stability.

Baa2/BBB-/BBB
Midstream - Americas
$3.15bn in index across 6 issues

Question 31

CAMERON LNG LLC (CAMLNG)

Answer 31

Cameron LNG operates a liquefied natural gas (LNG) export facility in Louisiana. It is positioned as a key player in the LNG market with long-term tolling agreements that provide stable revenue. Strengths: Low cash flow volatility due to availability-based tolling agreements. Weaknesses: Dependence on the credit quality of tolling counterparties.

A3/A/A
Midstream - Americas
$3.02bn in index across 4 issues ($3.02bn 144a)

Question 32

CHENIERE ENERGY PARTNERS LP (LNG)

Answer 32

Cheniere Energy Partners operates LNG export facilities, providing clean energy solutions. It benefits from long-term contracts and strategic market positioning. Strengths: Stable cash flows from long-term contracts and strong market demand. Weaknesses: High capital expenditure and exposure to regulatory risks.

Cheniere Energy , Inc is the holdco of a complex cap structure consisting of intermediate holdco CQP and opco LNG facilities at Sabine Pass and Corpus Christi. Strong cash flows on merchant LNG cargoes and debt reduction have pushed net leverage to 2X from 4.2X at 1Q22, but has increased to ~3.6X as LNG prices have moderated. Intends to do most issuance out of LNG and CQP boxes going forward vs opcos Sabine Pass Liquefaction and Cheniere Corpus Christi. With IG ratings achieved, excess FCF will shift toward shareholders. Appears fairly valued

Baa3/BBB-/BBB-
Midstream - Americas
$3.00bn in index across 2 issues

Question 33

DT MIDSTREAM INC (DTMINC)

Answer 33

Owns, operates, and develops natural gas midstream interstate and intrastate pipelines, storage, and gathering systems. Focuses on providing integrated natural gas services, including compression, treatment, and surface facilities, primarily in the United States. Extensive pipeline network and strategic positioning in key natural gas markets.

Rising star candidate

Ba1(Pos)/BB+/BBB-
Midstream - Americas
$2.70bn in index across 3 issues

Question 34

ENBRIDGE PIPELINES INC (ENBCN)

Answer 34

Enbridge Pipelines operates one of the largest and most complex pipeline systems in North America, transporting crude oil and natural gas. It is known for its extensive network and strategic importance in energy transportation. Strengths: Stable cash flows from long-term contracts and a strong credit rating. Weaknesses: High regulatory scrutiny and significant capital expenditure requirements.
Second highest quality midstream name

Company defined leverage reduced to 4.7X and in middle of their 4.5X-5.0X target range. Heavy capex slowing as major projects are completed and begin to generate cash flow. Will remain a heavy issuer with ~$6B of debt maturities in ht next two years. High leverage is offset by large scale and utility like nature of operations with high proportion of fixed fee take or pay contracts. Facing some regulatory/political headwinds (e.g. Line 5) that could weigh on spreads. Starting to look more fairly valued as it trades more in-line with mid-tier names like KMI and WMB.

Baa2/BBB+/BBB+
Midstream - Americas
$22.25bn in index across 29 issues

Question 35

Energy Transfer LP (ET)

Answer 35

Diversified energy company involved in the transportation, storage, and terminalling of natural gas, crude oil, and refined products. With a vast network of pipelines and terminals across the United States, it is a significant player in the energy infrastructure sector. Strengths: Strong asset base and diversified revenue streams enhance financial stability. Weaknesses: High leverage and exposure to commodity price volatility pose risks to creditworthiness.

Leverage of 4.35X is now within their 4-4.5X leverage target (adjusted to include proportional debt and EBITDA of affiliates), and mgmt has indicated they would like to move toward the low end of that range. Regulators have sidelined ET’s Lake Charles LNG project by denying permit extenstions due to lack of progress, which reduces project execution and financing risks. S&P and Fitch moved to mid-BBB, while Moody’s to positive outlook. Diversification and scale similar to KMI but lower leverage targets. Spreads have drifted wider of KMI so moving back to OW from Neutral

Baa2/BBB/BBB
Midstream - Americas
$42.78bn in index across 48 issues

Question 36

ENTERPRISE PRODUCTS OPERATING LLC (EPD)

Answer 36

Enterprise Products is a leading provider of midstream energy services, including natural gas, NGLs, crude oil, and petrochemicals. It benefits from a diversified asset base and extensive infrastructure. Strengths: Strong cash flow generation and a solid balance sheet. Weaknesses: Exposure to commodity price volatility and high capital expenditure.
Highest quality midstream name

EPD continues to execute well. Company defined leverage target was lowered to 3X (midpoint) in 2H23 from 3.5X, which EPD is in-line with at 3.1X. Moody’s and S&P both upgraded to low single A, despite company comments that they were not targeting upgrades as they want to ensure balance sheet flexibility if necessary for acquisitions. Has made comments in the past about interest in expanding into the dowstream chemical segment. Benefiting from increased NGL exports, but has more volumetric risk than Canadian names in low commodity price environments. UW reflects limited carry and limited spread upside post the January upgrades.

A3/A-/A-
Midstream - Americas
$27.72bn in index across 31 issues

Question 37

EQM MIDSTREAM PARTNERS LP (EQM)

Answer 37

Acquires, owns, and develops midstream natural gas assets in the Appalachian Basin. Provides midstream services to producers, marketers, and local distribution companies through its natural gas transmission, storage, and gathering systems. One of the largest gatherers of natural gas in the United States, strategically located to support energy development in the Marcellus and Utica regions.

Rising star candidate

Ba2/BBB-(Neg)/BB+
Midstream - Americas
$6.30bn in index across 9 issues

Question 38

FLEX INTERMEDIATE HOLDCO LLC (FLEXIH)

Answer 38

FLEX Intermediate Holdco manages a complex of LNG facilities, benefiting from stable cash flows through tolling agreements with investment-grade offtakers. Strengths: Stable revenue from long-term contracts. Weaknesses: Significant refinance risk and structural subordination of debt.

BBB-(Neg)/BBB- *-
Midstream - Americas
$1.25bn in index across 2 issues ($1.25bn 144a)

Question 39

GULFSTREAM NATURAL GAS SYSTEM LLC (GULFNG)

Answer 39

Gulfstream operates a natural gas pipeline system transporting gas from the Gulf of Mexico to Florida. It is known for its stable cash flows and strategic importance. Strengths: Stable revenue from long-term contracts with high-quality counterparties. Weaknesses: Exposure to regulatory changes and maintenance costs.

Baa2/BBB
Midstream - Americas
$0.90bn in index across 2 issues ($0.90bn 144a)

Question 40

HESS MIDSTREAM OPERATIONS LP (HESM)

Answer 40

Owns, develops, operates, and acquires midstream assets, providing fee-based services to Hess Corporation and third-party customers. The company operates through three segments: Gathering, Processing and Storage, and Terminaling and Export. HESM’s diversified midstream services support crude oil and natural gas production, enhancing its operational stability.

Rising star candidate

Ba2/BB+*+/BB+
Midstream - Americas
$3.09bn in index across 5 issues

Question 41

Kinder Morgan (KMI)

Answer 41

Kinder Morgan is one of the largest energy infrastructure companies in North America, operating approximately 79,000 miles of pipelines and 139 terminals. It transports natural gas, refined petroleum products, crude oil, and other products, and also provides storage services. Strengths: Stable, fee-based revenue from long-term contracts and a diversified asset base. Weaknesses: High leverage and exposure to regulatory changes.

KMI’s natural gas focused asset base is well positioned, and they are increasing investment in energy tranisition initiatives. While leverage of 4.1X is below its 4.5X target, when including debt of JVs on a proportional basis, leverage is closer to 4.5X. Also, the leverage target has remained static, while peers have lowered theirs. Higher capex and interest expense will move them to FCF neutral vs recent history of FCF positive. KMI has signalled willingness to increase leverage to fund share repurchases and is interested in acquiring LNG assets. UW reflects tightening vs peers, notably Energy Transfer.

Baa2/BBB/BBB
Midstream - Americas
$27.44bn in index across 40 issues

Question 42

MPLX LP (MPLX)

Answer 42

MPLX is a master limited partnership that provides midstream energy services, including transportation, storage, and processing of natural gas and crude oil. It is supported by its parent company, Marathon Petroleum. Strengths: Stable cash flows from long-term contracts and strong parent company support. Weaknesses: High leverage and exposure to regulatory changes.

Low leverage offsets higher than average exposure to gathering and processing, which has shorter contracts with more volumetric exposure to generally lower quality counterparties, as well as MPLX’s high exposure to refined product transport and refiner parent Marathon Petroleum. Will refinance a $1.1B 4Q24 maturity rather than reduce debt. Bought assets in Utica from Summit for $625M cash in 1Q24. Appears fairly valued at levels near ET and KMI.

Baa2/BBB/BBB
Midstream - Americas
$19.47bn in index across 17 issues

Question 43

NATIONAL FUEL GAS COMPANY (NFG)

Answer 43

National Fuel Gas is a diversified energy company involved in exploration, production, pipeline, and storage operations. It is well-positioned with a balanced portfolio. Strengths: Diversified operations and stable cash flows. Weaknesses: Exposure to commodity price volatility and regulatory risks.

Baa3/BBB-/BBB
Midstream - Americas
$1.90bn in index across 5 issues

Question 44

NGPL PIPECO LLC (NGPLCO)

Answer 44

NGPL PipeCo operates a major natural gas pipeline system in the U.S., providing transportation and storage services. It benefits from stable, fee-based revenue. Strengths: Stable cash flows from long-term contracts. Weaknesses: High leverage and exposure to regulatory changes.

Baa3/BBB-
Midstream - Americas
$1.93bn in index across 3 issues ($1.93bn 144a)

Question 45

NUSTAR LOGISTICS LP (NSUS)

Answer 45

Operates pipelines and storage facilities, providing transportation and storage services for crude oil, refined products, and specialty liquids. Their business model emphasizes maintaining a diversified asset base and strategic locations to ensure stable revenue streams. Financially, NuStar benefits from long-term contracts and a resilient business model that supports consistent cash flow.

Ba1/BB+/BB+
Midstream - Americas
$2.25bn in index across 4 issues

Question 46

ONEOK INC (OKE)

Answer 46

ONEOK is a leading midstream service provider, focusing on the gathering, processing, storage, and transportation of natural gas and NGLs. It is well-positioned with a strong presence in key production areas. Strengths: Strong financial performance and stable cash flows from fee-based contracts. Weaknesses: Exposure to commodity price fluctuations and high capital expenditure.

The Megellan transaction increased scale and diversification, driving rating agency upgrades to mid BBB. The transaction was funded 37% cash and and 63% stock. Leverage increased from 3X to 4.2X proforma. The subsequent purchases of EnLink and Medallion will push reaching their 3.5X leverage target to 2026, as FCF will primarily go to shareholders. The move to Neutral from Underweight reflects the potential they can migrate to high BBB in the intermediate term due to their increased scale and diversification

Baa2/BBB/BBB
Midstream - Americas
$20.53bn in index across 31 issues

Question 47

PIPELINE FUNDING COMPANY LLC (PIPFND)

Answer 47

Pipeline Funding Company is a financing entity for pipeline projects, providing capital for infrastructure development. It benefits from strong backing by its parent company. Strengths: Strong financial support from parent company. Weaknesses: Dependence on the financial health of parent and project-specific risks.

Baa2/BBB
Midstream - Americas
No USD Bonds Outstanding

Question 48

PLAINS ALL AMERICAN PIPELINE LP / PAA FINANCE CORP (PAA)

Answer 48

Plains All American Pipeline is a master limited partnership that transports, stores, and markets crude oil and NGLs. It has a significant presence in key production basins. Strengths: Stable revenue from long-term contracts and a diversified asset base. Weaknesses: High leverage and exposure to commodity price volatility.

Adjusted leverage of 3.1X (including 50% of pref), is below their lowered 3.25X-3.75X target range, contributing to 4Q23 upgrades to mid BBB by S&P and Fitch. Move to Neutral reflects spread tightening vs peers. More commodity exposed asset base and smaller scale will likely continue to result in it trading behind peers.

Baa3/BBB/BBB
Midstream - Americas
$6.93bn in index across 10 issues

Question 49

SOUTHERN NATURAL GAS COMPANY LLC (SONGAS)

Answer 49

Southern Natural Gas operates a natural gas pipeline system regulated by the Federal Energy Regulatory Commission (FERC). It is known for its stable operations and strategic importance. Strengths: Low-risk, regulated revenue and strong credit metrics. Weaknesses: Exposure to regulatory changes and maintenance costs.

Baa2/BBB+/BBB+
Midstream - Americas
$0.50bn in index across 1 issues ($0.50bn 144a)

Question 50

TARGA RESOURCES PARTNERS LP (TRGP)

Answer 50

Targa Resources is a leading provider of midstream services, including gathering, processing, and transporting natural gas and NGLs. It is known for its extensive infrastructure and strategic market positioning. Strengths: Strong cash flow generation and a diversified asset base. Weaknesses: High capital expenditure and exposure to commodity price volatility.

The improving outlook reflect Targa’s reduced leverage following acquisitions, increased scale, increasingly fee based revenue, and improving FCF profile, particularly in 2025 once major capex projects are completed. Targa benefits from its integrated natural gas liquids footprint, high exposure to the Permian Basin (75%), and from its high quality and diverse customer base. After having spent ~$2.5B/yr in 2022 and 2023, and a budget of $2.7B in 2024, mgmt expects capex will drop toward $1.4B in 2025 and going forward. Management leverage target of 3.0-4.0x is lower than most midstream peers, although the range is wide and mgmt has been willing to exceed it for acquisitions. Has tightened with increase scale but appears rich relative to larger more diversified peers.

Baa2/BBB/BBB
Midstream - Americas
$11.53bn in index across 14 issues

Question 51

TC Energy Corp (TRPCN)

Answer 51

TransCanada, now known as TC Energy, operates a vast network of natural gas pipelines across North America. It is a key player in the energy infrastructure sector. Strengths: Stable cash flows from regulated assets and long-term contracts. Weaknesses: High capital expenditure and exposure to regulatory changes.

Third highest quality midstream name

Adjusted leverage of 5.0X is above their 4.75X target, but similar to Enbridge is offset by large scale and utility like nature of operations with high proportion of fixed fee take or pay contracts. Project acceleration and cost overruns resulted in capex revisions and outspending cash flow. Funded in part with C$5B of divestitures during 2023 and C$3 in 2024. Mgmt intends to be below their 4.75X leverage target by YE24. The spin-off of their oil pipeline segment (oil sands focused) as a new company named South Bow was completed in 3Q24 and improves TC Energy’s ESG profile. Appears fairly valued trading in-line with BBB peers.

Baa3/BBB-(Neg)/BBB-
Midstream - Americas
$14.23bn in index across 16 issues

Question 52

WESTERN MIDSTREAM OPERATING LP (WES)

Answer 52

Western Midstream provides midstream services, including gathering, processing, and transporting natural gas and crude oil. It operates primarily in the Rocky Mountains and Texas. Strengths: Stable cash flows from long-term contracts and a strong asset base. Weaknesses: High leverage and exposure to commodity price fluctuations.

WES’s earnings are more Gathering & Processing related vs. other IG midstream peers. The $885M all-cash Meritage acquisition increased proforma net leverage to 3.5X, but will likely be able to get leverage back toward their 3X target in 2025. OXY owns 43% of the common units, which was recently reduced from 48% as OXY sells assets to achieve it’s $4.5B-$6.0B divestiture target. Credit profile tied OXY which is deleveraging. Move to overweight reflects low leverage and spread pick-up vs peers.

Baa3/BBB-/BBB-
Midstream - Americas
$6.20bn in index across 10 issues

Question 53

WILLIAMS COS (WMB)

Answer 53

Focuses on natural gas processing and transportation, operating one of the largest interstate natural gas pipeline systems in the U.S. It is well-positioned to benefit from the growing demand for natural gas as a cleaner energy source. Strengths: Strong market position and stable cash flows from regulated assets. Weaknesses: High capital expenditure requirements and exposure to regulatory and environmental risks.

Lowered their leverage target to 3.5X-4.0X vs prior 4.2X. Currently at 4.1X but leverage will likely fall again in 2025. Has done several tuck-in acquisitions recently but now signaling greater focus on organic capex. Most free cash flow will be directed toward shareholders. With spreads well through KMI and other mid-tier comps, WMB appears over-valued.

Baa2/BBB/BBB
Midstream - Americas
$22.31bn in index across 29 issues

Question 54

BAKER HUGHES HOLDINGS LLC (BHI)

Answer 54

Baker Hughes is a leading energy technology company providing solutions for energy and industrial customers worldwide. It is known for its innovative technologies and comprehensive service offerings across the oilfield services sector. Strengths: Strong market position and diversified service portfolio. Weaknesses: Exposure to cyclical oil and gas markets and significant capital expenditure.

A3/A-
Oil Field Services - Americas
$5.47bn in index across 6 issues

Question 55

HALLIBURTON COMPANY (HAL)

Answer 55

Halliburton is one of the world’s largest providers of products and services to the energy industry, focusing on exploration, development, and production of oil and natural gas. It is recognized for its extensive global operations and technological advancements. Strengths: Strong operational efficiency and broad service offerings. Weaknesses: High exposure to volatile oil prices and competitive pressures.

With gross leverage of 1.5X below their 2.0X target, mgmt will direct at least 50% of FCF to shareholders, so expect continued dividend increases and more substantive share repurchases. Revenue growth and margin expansion is expected to continue as mgmt views sector as in early phase of multi-year upcycle. HAL has higher N. American exposure (~50%) than IG peers (~20%), which has had strong recovery but pace of improvement has slowed with lower land rig count. International should continue to see improving results.

A3/BBB+(Pos)
Oil Field Services - Americas
$7.38bn in index across 8 issues

Question 56

SCHLUMBERGER INVESTMENT SA (SLB)

Answer 56

Schlumberger is a global leader in oilfield services, offering technology and services for reservoir characterization, drilling, production, and processing. It stands out for its technological innovation and extensive global footprint. Strengths: Strong technological capabilities and diversified geographic presence. Weaknesses: Dependence on capital spending by oil and gas companies and exposure to geopolitical risks.
Highest quality OFS name

SLB has broadest product depth and scale in sector, with high exposure to national oil companies. The international segment and offshore is expected to improve more quickly going forward than North America, with continued margin expansion overall. Leverage is now down to its 1.5X target, driven by both debt reduction and EBITDA growth, so will continue to direct at least 50% of FCF to shareholders. Bonds appear fairly valued.

A1/A(Pos)
Oil Field Services - Americas
$7.12bn in index across 10 issues ($3.87bn 144a)

Question 57

MARATHON PETROLEUM CORP (MPC)

Answer 57

Marathon Petroleum is a leading integrated downstream energy company, focusing on refining, marketing, and transportation of petroleum products. It is known for its extensive refining capacity and strategic logistics network. Strengths: Strong cash flow generation and diversified operations. Weaknesses: High capital expenditure and exposure to refining margin volatility.

LTM net leverage peaked at >10X at 1Q21, fell to 0.7X at 1Q23 on stronger refining margins and volumes, and crept up to 1.8X by 2Q24 as margins moderated. Margins should remain above mid-cycle, and mgmt indicates they do not intend to further reduce gross debt, and will continue repurchasing shares. The cash balance has dropped to $8.5B at 2Q24 vs. $13.1B at 3Q23, but is still well above their $1B minimum. Debt to cap of 24% (excluding MPLX debt) remains below their 25-30% target. While the 63% stake in MPLX provides earnings diversification, the midstream entity is more levered than stand-alone MPC. While current strong margins provide cushion, there doesn’t appear to be much upside in the credit profile and they do remain exposed to refining volatility. As a result continue to recommend an underweight.

Baa2/BBB/BBB
Refining - Americas
$4.16bn in index across 6 issues

Question 58

PARKLAND FUEL CORP (PKICN)

Answer 58

Leading independent marketer and distributor of fuel and petroleum products in North America and the Caribbean. Their business model includes retail, commercial, and wholesale fuel operations. Financially, Parkland benefits from a diversified revenue base and strategic acquisitions that enhance their market position.

Ba3/BB
Refining - Americas
$2.10bn in index across 3 issues

Question 59

Phillips 66 (PSX)

Answer 59

Diversified energy manufacturing and logistics company with operations in refining, midstream, chemicals, and marketing. Known for its robust refining capacity and integrated business model, it plays a crucial role in the energy sector. Strengths: Strong cash flow generation and diversified operations provide financial resilience. Weaknesses: Exposure to refining margin volatility and significant capital investment needs can impact financial flexibility.
Highest quality refining name

Net LTM leverage peaked at 12X at 1Q21, dropped to 0.7X at 1Q23 on stronger margins and volumes, but has increased to 1.7X at 2Q24 as margins moderated. Debt to cap of 38% is above their 25-30% target, so expect some modest debt reduction along with continued high shareholder payouts. Midstream and chemical assets provide some earnings diversification, although chemical segment results remain well below mid-cycle. PSX still remains highly sensitive to refining fundamentals. Recommend underweight given current spread and the historic volatility.

A3/BBB+
Refining - Americas
$12.59bn in index across 16 issues

Question 60

VALERO ENERGY PARTNERS LP (VLO)

Answer 60

Valero Energy Partners, now part of Valero Energy Corporation, focuses on the transportation and storage of crude oil and refined petroleum products. It benefits from stable, fee-based revenue streams. Strengths: Stable cash flows from long-term contracts and strategic asset base. Weaknesses: High leverage and exposure to regulatory changes.

Valero lacks significant diversification away from its core refining assets, and saw LTM EBITDA at about breakeven levels through 1Q21. Leverage has moved back toward 1X from 0.5X as margins are falling moderately and they continue to direct FCF to shareholders. Given current spread and historic volatility, recommend an underweight

Baa2/BBB/BBB
Refining - Americas
$7.00bn in index across 11 issues