Oil prices and sector downgrades

Fitch Ratings has said that the oil and gas sector accounts for most of the downgrades in the first quarter of this year, at 28%, primarily driven by the drop in oil prices. Weak oil prices have significantly reduced the rating headroom for many oil and gas companies that went into the slump with stretched credit profiles. Fitch has said that this is particularly true among speculative grade entities that have a concentrated risk and/or small operating base. Negative rating actions, including those for investment grade entities, have reflected limited headroom in the prior ratings. For speculative grade issuers, downgrades have also reflected their vulnerability in the current cycle, such as liquidity or stretched credit profiles.

Fitch has said that it expects oil prices to remain low compared to June 2014 levels over the next three years. The base WTI price assumptions were reduced early this year to US$50/bbl for 2015, US$60/bbl for 2016 and US$75/bbl for 2017. Continued negative rating actions are also expected to be driven by company actions in response to weak prices, and the risk that recovery in the oil price is slower than Fitch is anticipating. Upgrades will probably be limited over the next 12 months.

Energy companies have announced significant cuts in planned capital expenditures as the economics of new projects have become less attractive. The biggest cuts have been made by North American shale producers, which typically have high financial and operating leverage and low ratings. Capex cuts have been smaller among global integrated oil and gas companies with higher ratings due to the need to continue investing through the cycle. The expected decline in drilling and services costs in the current downcycle will be a partial offset to low oil prices for exploration and production companies. While the benefit is global, it is especially concentrated in onshore North American shale companies.


Edited from press release by Claira Lloyd

Published on 30/04/2015


Get your FREE Oilfield Technology magazine »

Get your FREE trial of Hydrocarbon Engineering magazine »

Get your FREE trial of World Pipelines magazine »


 
 

Related articles

Oil prices and real estate values

A study from House Canary has been released that looks at how oil prices hitting US$40/bbl will impact real estate.

Oil prices and the export ban

A new IHS study has said that amidst lower oil prices, the negative economic impacts of US crude oil export ban are all the more stark.

Oil prices and tax revenues

The US Energy Information Administration has said that the oil price decline has lead to lower tax revenues in top oil producing US states.

Oil prices 'low for up to 3 years'

The boss of oil giant BP Bob Dudley has said that oil prices could remain low for up to three years.

Recommend magazines

  Hydrocarbon Engineering  LNG Industry  Oilfield Technology  World Pipelines