Liquidity stress in the oil and gas industry reached its highest-ever level in February, continuing a trend that began in late 2014, Moody’s Investors Service said in a note published Tuesday.
Moody’s Oil & Gas Liquidity Stress Index (LSI) reached a record-high 27.2% in February, surpassing its worst-ever level of 24.5% during the most recent recession, the firm said. The increase was driven by 19 speculative grade liquidity (SGL) rating downgrades of energy companies last month.
Seventeen exploration and production (E&P) companies were downgraded in February, with 10 dropped to SGL-4, while one oilfield services was also dropped to SGL-4, Moody’s said.
This liquidity stress on oil and gas companies helped drive up the ratings agency’s composite LSI, which reached 8.9% in February, up from 7.9% in January.
“The prolonged weakness in energy sector credit conditions is driving the sustained increase in the LSI,” Moody’s Senior Vice President John Puchalla said. “Energy liquidity downgrades came as part of our ongoing review of oil and gas companies in light of the weaker price environment.”
According to Moody’s, the composite LSI has been trending upward since November 2014 and has now hit its highest level since November 2009. The LSI has now “moved above its long-term average,” Puchalla said. “This progression signals that the default rate will continue to rise as the year progresses.”
The firm currently projects the U.S. speculative-grade default rate to rise to 4.7% in January 2017 from the current rate of 3.1%.
“That said, most liquidity strains continue to relate to commodity price weakness and the resulting derivative effects,” Moody’s said.
Just four of the 21 sectors Moody’s currently tracks have LSI rates above 10% -- E&P, Oil Field Services, Other Energy and Utilities -- with all four “following at least in part from commodity-related price pressure.”
Throughout 2015, Moody’s and other ratings agencies tracked the rising liquidity stress among energy companies struggling with falling commodity prices (see Shale Daily, Dec. 18, 2015; Nov. 30, 2015; Nov. 17, 2015; Nov. 3, 2015; March 30, 2015).
In their 4Q2015 earnings calls, faced with price-related asset impairments and the prospect of shrinking borrowing bases, many oil and gas companies have laid out plans to tighten their belts and spend within cash flow as they wait out the downturn. Some energy executives are looking ahead to 2017 for a potential rebound as E&Ps work through their inventories of drilled but uncompleted wells and production begins to decline (see Shale Daily, Feb. 29).
Meanwhile, attorneys active in the industry have raised concerns that the impact from distressed E&Ps could be felt in the midstream sector (see Daily GPI, Feb. 23).