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Moody’s: Oil/Gas Liquidity Stress Hit Another Record in March

Liquidity stress continues to rise in the oil and gas sector, according to Moody’s Investors Service.

The ratings agency said Monday that the liquidity stress index (LSI) across all sectors increased to 10.3% in March, up from 9% in February, with the increase “fueled by deterioration in oil and gas-related sectors as more energy companies succumb to financial woes due to lower fuel prices.” The oil and gas LSI climbed to a new record high in March at 31.6%, up from 27.2% the previous month.

Last month’s oil and gas LSI of 27.2% was the previous record high (see Shale Daily, March 2).

“The composite LSI’s rise is echoing the climb following the last major turn in the credit cycle that started in mid-2007 and ultimately led to an LSI peak of 20.8% in March 2009. This time, however, the LSI’s gains are much more narrowly focused on energy,” Moody’s said.

The increases in the LSI point to the U.S. default rate increasing to 5.3% by February 2017, up from the current default rate of 3.6%, Moody’s said.

Moody’s said it also counted a record 42 credit downgrades in March, with more than half of those attributable to weakness in the energy space. Of the 42 total downgrades, 14 were oilfield services companies and 8 were exploration and production (E&P) companies. Of 17 issuers dropped to Moody’s “SGL-4” rating, 10 were in energy, with “a few in energy-related sectors such as utilities,” the agency said.

The LSI excluding oil and gas companies rose to 4.8% in March from 4.1% in February, suggesting that “weakness continues to seep beyond energy-related sectors,” according to Moody’s. But the non-oil and gas LSI is still below the long-term average of 6.5%, while “sector LSIs are still well shy of levels suggesting an accelerating default rate.”

Moody’s and other ratings agencies have monitored increasing liquidity stress in the oil and gas sector since commodity prices began to collapse in late 2014 (see Shale Daily, Nov. 30, 2015; Nov. 17, 2015; Nov. 3, 2015; Sept. 4, 2015).

Meanwhile, in response to falling prices, E&Ps have severely slashed capital spend (see Daily GPI, April 4), looking to only the most economical plays for investment (see Shale Daily, March 28).

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