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Energy Woes Push Moody's Liquidity Stress Index Higher

Lower oil and natural gas prices pushed Moody's Investor Services' Liquidity Stress Index (LSI) to its highest level in almost five years, with the energy LSI at its highest level since January 2010, the credit ratings agency said Wednesday.

The overall LSI rose to 5.1% in August from 4.3% in July, the highest level since December 2010. However, the energy LSI jumped to 12.7% from 10.5% in July, the highest level in more than five years, as more oil and gas issuers fell to a speculative-grade liquidity (SGL) rating of "4," the lowest level.

Moody's rates issuers from SGL-1, which is considered "very good" to SGL-4, considered "weak" and more likely to default.

"Excluding energy from the LSI paints a different and more benign picture of speculative-grade liquidity -- showing that underlying credit conditions remain supportive and weakness in energy is not spreading broadly to other sectors," said Moody's Senior Vice President John Puchalla.

Exploration and production (E&P) companies, as well as oilfield service companies, continued to account for most of the energy downgrades and defaults.

"Energy contributed to seven of the 11 downgrades of speculative grade issuers in August," including Appalachian operator Ascent Resources -- Marcellus LLC (Caa2 negative), a company originally formed by Aubrey McClendon and part of Ascent Resources LLC (see Shale DailyJune 10). Dallas-based Exco Resources Inc. (Caa1 negative) also tumbled to SGL-4, along with Radnor, PA's Penn Virginia Corp. (Caa1 negative).

"The other four energy downgrades were in oilfield services as drillers continue to push for cost reductions to offset the drop in oil prices." Downgrades included Pioneer Energy Services (B2 negative), which fell two notches to SGL-4.

Excluding the energy sector, liquidity rating upgrades exceeded downgrades in August, according to Moody's. "Multiple sectors were affected, with upgrades driven generally by improving operations and cash flow."

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