Moody’s: Most Canadian spec-grade E&P companies can withstand oil prices

Most of Canada’s speculative-grade exploration and production (E&P) companies are well positioned to withstand the current slump in oil prices, Moody’s Investors Service says in a new report. Nevertheless, they must manage their liquidity positions effectively, as access to the capital markets will become more expensive and uncertain.

“Canadian speculative-grade E&P companies should, for the most part, be able to weather a period of low commodity prices, thanks to their strong balance sheets, adequate liquidity, and ability to sustain production without significant negative free cash flow,” says Paresh Chari, Moody’s analyst. “They will, however, try to avoid the need for new financing, which will be more costly and less certain.”

Lower revenues due to the drop in oil prices will reduce cash available for capital expenditures, Chari says in the report “Canadian Exploration and Production: Most Speculative-Grade Companies Will Withstand Weak Prices in 2015.” And most Canadian speculative-grade E&P companies have already significantly reduced their spending plans for 2015. For liquids-focused companies, such as Lightstream Resources, lower earnings this year also increase the risk of covenant violations.

Meanwhile, companies such as Jupiter Resources, Seven Generations, Northern Blizzard Resources, and Canbriam Energy will benefit from the hedging arrangements they made before oil prices began to tumble. The weakening Canadian dollar has partially offset the drop in the price of West Texas Intermediate crude, since Canadian producers receive their revenue in US dollars but pay their expenses and record capital investments mainly in Canadian dollars.

Seven of the 11 Moody’s speculative-grade Canadian E&P companies use borrowing base revolving credit facilities, and the borrowing bases for liquids-focused companies including Northern Blizzard Resources and Lightstream are likely to shrink when the banks redetermine these in April–May.  

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