The energy (oil and gas) sector accounts for the most downgrades in the first quarter of 2015, at 28%, primarily driven by the drop in oil prices, according to Fitch Ratings.
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 says 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 expects that oil prices will remain low compared to June 2014 levels over the next three years. Fitch’s base West Texas Intermediate (WTI) price assumptions were reduced in early 2015 to $50/barrel in 2015, $60/bbl in 2016 and $75/bbl in 2017.
Continued negative rating actions will be driven by company actions in response to weak prices, and the risk that the recovery in the oil price is slower than Fitch anticipates. 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.