CHICAGO & NEW YORK–(BUSINESS WIRE)–The rating outlook for North American energy remains negative, reflecting lingering challenges in the exploration and production (E&P) and oil field services/drillers subsectors, according to Fitch Ratings.
The E&P market remains split. In the investment-grade (IG) E&P space, a key theme was one of compression, with most rating actions limited to a combination of a single-notch downgrade and/or a Negative Outlook. Many IG names mitigated rating actions this year by strong self-help measures to preserve credit quality in the face of lower prices, including severe capex and dividend cuts, equity raises, asset sales and deleveraging. Multi-notch downgrades were generally associated with event risk or acquisitions.
At the same time, high-yield E&P defaults have skyrocketed and stood at approximately 30% for E&Ps as of October. Many supports for the lowest rated high-yield credits – hedges, monetizable assets, borrowing base availability – have fallen away. With stricter regulatory trends in energy lending, Fitch believes banks have made their decisions about which credits they are inclined to support, or not. Fitch believes high-yield E&P defaults are close to peaking at the current level.
The pace of cost improvements for US shale-based producers is a key story in the current downturn; efficiency gains and services cost deflation have pushed US shale costs down faster than in the rest of the world, setting the stage for rebounding activity in the US shale patch at lower price levels. A key question in 2017 is how many of these gains the sector can hold onto in a rising price environment. Fitch expects that while some giveback is inevitable, many producers will continue to benefit from the shift toward pad drilling, longer laterals, enhanced completions and other structural efficiencies. These should improve full-cycle economics and cash generation per barrel, all else being equal.
In contrast, we expect any pickup in activity and pricing power in the offshore segment to continue to lag, given the considerable oversupply in the rig market, limited moves to rationalize capacity, and the near-term reallocation of capex budgets to short-cycle shale and away from longer term projects, including those offshore.
The overall sector outlook for North American energy is stable, as a trend of gradually improving fundamentals led to a better pricing environment after lows seen in the first quarter. While oil inventories remain high and global demand is still subdued, a significant supply response in the US (1.0 million barrel per day decline versus the June 2015 peak) emerged. Two years of sharply lower global E&P capex should set the stage for further production declines and stabilization in pricing.
We expect additional ratings stabilization in 2017 as gradually rising oil prices improve metrics. Should a rising price scenario fail to materialize, further rating adjustments may be necessary absent additional corporate actions.
[expand title=”Advisories & Contact”]Additional information is available on
www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Related Research
2017 Outlook: North American Energy (Pricing and Credit Quality Have Begun to Turn a Corner)
https://www.fitchratings.com/site/re/890706
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
Contacts
Fitch Ratings
Mark C. Sadeghian, CFA, +1-312-368-2090
Senior Director
Corporates
Fitch Ratings
70 West Madison Street
Chicago, IL
or
Kellie Geressy-Nilsen, +1-212-908-9123
Fitch Wire
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com[/expand]