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Speculative U.S. E&Ps Sinking in Moody’s Ratings; Gas-Focused Fare Better Than Oil-Based

Preserving liquidity has become the name of the game, as U.S. exploration and production (E&P) companies continue to look for ways to remain viable in the current oil/gas price downturn.

Moody's Investors Service said that as of March 1, oil and natural gas borrowers made up almost 14% of the list of lowest-rated companies, the highest of any industry. E&Ps had made up on average about 8% of the Moody's list since it began in March 2009.

And it's the oil producers who are sitting further out on the ledge. Unless hedging programs are in place, E&Ps that concentrate more on producing liquids than on natural gas "will experience a more drastic reduction in earnings, unleveraged cash margins and cash flow generation than their peers that produce higher proportions of natural gas in 2015," Moody's analysts said. "As a result, liquids focused E&P companies are reducing their capital spending more than gas-focused companies."

Moody's Liquidity-Stress Index (LSI) for speculative-grade issuers increased to 4.2% in mid-March from 4.0% in February and 3.9% in January.

"The index has been gaining on the back of a sharp rise in the energy LSI, which has more than doubled from 4.5% at the end of 2014 to 9.8% as of mid-March," said Senior Vice President John Puchalla.                                                                                                 

"The deterioration in the energy sector's liquidity is not uniform," Puchalla and his team said. Independents "are taking the biggest hit while refining and marketing is feeling less of a pinch. E&P is typified by smaller, low-rated companies that are particularly vulnerable to falling oil prices" because of their "relative lack of diversification and tighter credit access when market conditions deteriorate.

"The LSI for oilfield service (OFS) companies was a modest 2.2% at the end of February, although we anticipate a declining rig count will create incremental pressure on cash flow and liquidity. For example, we lowered the liquidity rating of the OFS company Hercules Offshore to SGL-4 from SGL-2 in early March." The higher the SGL rating, the higher risk for solvency issues. SGL-4 is Moody's lowest liquidity rating on a scale of 1 to 4.

Analysts have calculated that the rated North American E&Ps plan to reduce capital spending by 41% in aggregate this year, far more than integrateds, which were expected to cut spending by around 10%.                                  

"Among the rated North American E&P companies, those with speculative-grade ratings will reduce capital spending by 47%, while investment-grade companies will reduce capital spending by 36% in aggregate," wrote associate analysts Prateek Yanati Reddy and Dylan G. Duzey. "As low commodity prices persist, E&P companies are trying to preserve liquidity by reducing development activities and restricting capital spending to only their highest-return assets."

Last year, median spending was about $600 million for North America's E&Ps, noted the analysts. However, even with lower spending, "speculative-grade companies have limited financial flexibility today because of their smaller scale than investment-grade companies, whose median capital spending in 2014 reached about $5 billion."

The investment-grade E&Ps "have better access to capital markets than speculative-grade companies, even at times of weak commodity prices, and have acreage in multiple hydrocarbon basins, allowing them to reallocate their capital budgets towards highest-return assets when necessary."

Moody's estimated that about 40% of its North American rated E&Ps have hedged at least half of their 2015 production. "As hedges start rolling off, some speculative-grade companies will be forced to maintain production even at cyclically low commodity prices in order to service their debt. For certain companies, shareholder pressure to monetize hedges will increase cash flow volatility."

Among the least creditworthy on Moody's list are Gulf of Mexico operator Energy XXI Ltd. and Midstates Petroleum Co. Also suffering from credit issues are Halcon Resources Corp., Samson Investment Co. and Sidewinder Drilling Inc.

Some North American energy firms already are seeking creditor protection. Natural gas-heavy Quicksilver Resources Inc. filed for bankruptcy protection in mid-March (see Shale DailyMarch 18). Houston-based explorer Dune Energy Inc. and marine contractor Cal Dive International Inc. also have filed for bankruptcy (see Daily GPI, March 9; March 4). Calgary-based Gasfrac Energy Services Inc., which provides oilfield services, obtained court approval to sell its operations in January after filing for bankruptcy (see Shale DailyJan. 28). Coiled tubing company Step Energy Services Ltd., backed by investment firm ARC Financial Corp. and also based in Calgary, is buying most of Gasfrac's assets and related technology.

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