Standard & Poor's Ratings Services has taken negative rating actions on six rated Canadian oil and gas companies operating in the industry's exploration and production (E&P) and integrated sector.
On Sept. 29, S&P announced its intention to review its ratings on Canadian companies operating in the upstream segment, following the publication of its revised crude oil and natural gas price assumptions published on Sept. 24. The rating actions complete S&P’s E&P portfolio review. S&P will determine subsequent rating actions on a company-specific basis, and these will reflect its view of each company's credit profile during the relevant outlook period.
S&P stated, “We have taken negative rating actions on two investment-grade companies, Cenovus Energy Inc. and Husky Energy Inc., and four speculative-grade rated E&P companies (Harvest Operations Corp., Jupiter Resources Inc., Lightstream Resources Ltd., and Bellatrix Exploration Ltd.), initially rated in the 'B' category.
“Although we generally believe the credit profiles of investment-grade oil and gas companies have greater resilience at troughs of the hydrocarbon price cycle, the rating actions taken on both Cenovus and Husky reflect our view of the changes to each company's business risk and financial risk profiles caused by the persistent weakness of crude oil and natural gas prices, and the resulting downward revision of our hydrocarbon price assumptions. Specifically, our initial 'BBB+' corporate credit rating on Cenovus incorporated a positive comparable ratings analysis (CRA) modifier that reflected the company's strong operating efficiency and profitability profiles. In our opinion, deteriorating oil and gas prices have impaired these attributes of Cenovus' business risk profile. As a result, we no longer believe the use of a positive CRA is warranted.
“The decision to revise our outlook on Husky to negative from stable reflects our belief that the company's financial risk profile, which has always been the single strongest factor supporting the rating, will weaken in tandem with oil and gas prices despite the company's continued efforts to strengthen its balance sheet. Although we believe Husky's overall business risk profile is commensurate with a 'BBB' rating, we do not believe it is sufficiently strong to support the company's credit profile as its financial risk profile weakens.
“The remaining four rating actions largely reflect our view of the affected companies' deteriorating cash flow and leverage metrics and, in some instances, a material impairment of liquidity. The ‘highly leveraged’ capital structures at both Harvest and Lightstream, and the resulting high fixed charge funding requirements, pose an immediate threat to these companies' ability to sustain their operations.
“Although Lightstream has stalled the near-term deterioration of its liquidity by reducing capital spending below maintenance levels, this compromises its forecast cash flow generation, and further exacerbates its leverage profile. We believe the credit profiles of both Jupiter and Bellatrix have greater resilience, by virtue of their existing liquidity positions, but weaker cash flow generation impairs their ability to exploit the organic growth potential inherent in their upstream assets. As a result, we believe these companies will face challenges in achieving the reserves and production growth that we expected to strengthen their credit profiles, and provide the impetus for future positive rating actions.”