Robust oil and natural gas prices continue to generate significant free cash flow and strong credit protection metrics for upstream companies, providing independent producers the opportunity to focus on long-term balance sheet improvement and potentially achieve ratings upgrades, according to a report issued on Tuesday by Fitch Ratings.

The eight-page report by analysts Bryan Caviness, Patrick McGeever and Sean T. Sexton, examines the key issues affecting the credit profiles of the independents: reserves (size, quality, and location), development and acquisition costs, lifting costs and price realizations. The criteria report provides an overview of Fitch’s ratings methodology for independent oil and gas producers, such as Kerr-McGee, Amerada Hess, and Anadarko, among others.

“Given the asset-intensive nature of the industry, Fitch’s cash flow analysis is particularly appropriate for the upstream sector,” the report indicated. “As prices and financial performance are cyclical, Fitch attempts to assess ratings ‘through the cycle.’ Producer ratings are based on longer term mid-cycle price expectations to provide investors with an analysis of a company’s long-term credit worthiness.”

The analysts noted that a “few distinguishing differences exist” when analyzing producers. “First and foremost is the depleting nature of the company’s asset base and the requirement to reinvest significant capital to maintain the asset base and collateral value. Additionally, the cyclicality of cash flows resulting in swings in oil and gas prices is greater than in many other industries, requiring oil and gas producers to have less relative leverage, all things being equal.”

However, with excess cash now on hand, the “ultimate effect” is the producers’ ability to timely repay debt obligations, and that remains the “core focus” for evaluating the credit quality of an upstream company, the analysts said.

The full report, “Rating North American Independent Oil and Gas Producers,” is available at www.fitchratings.com.

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