Monday, July 31, 2017 9.25AM /
A sustained sub-$50 crude oil price scenario through 2018 will
likely drive weaker operating profiles and lower production forecasts for some
high yield oil exploration and production (E&P) companies, pressuring their
ratings, Fitch Ratings says. For most, however, credit quality is expected to
improve if prices remain at or above $50 per barrel.
Fitch expects that further rating actions for high-yield E&P
issuers will be focused and not generalized across the entire sector. However,
we believe twelve months or more of oil prices sustained at or below $45/bbl
could pressure ratings at select high-yield issuers. Prolonged oil price
pressure would likely worsen negative free cash flow profiles for more
vulnerable E&P companies, with increasing calls on liquidity and the
potential for lower EBITDA to push leverage above base case expectations.
In a sustained $40/bbl environment, operating conditions would be more
challenging. Ratings could come under pressure during a shorter period (as
little as 6 to 12 months) for firms with high exposure to oil prices, limited
liquidity runways, or weak cost positions.
E&P issuers with greater leverage sensitivity to low oil
prices include MEG Energy, Denbury Resources and California Resources. Fitch
would expect any downgrades in an extended sub-$50/bbl scenario to be focused
on E&P's with weaker liquidity, higher full-cycle costs, and limited hedge
Most high yield E&P issuers in our coverage universe are
likely to survive, and in select cases thrive, when oil prices remain above $50
per barrel. Survivors of the 2016 industry shake-out, when many high yield
E&P companies filed for bankruptcy protection, generally continue to
benefit from higher quality assets, good cost positions and lower debt levels
than the debt-heavy players in the early shale period.
Using Fitch's base case price deck (West Texas Intermediate:
$50/bbl in 2017, $52.5/bbl in 2018) forecasts for most issuers point to better
cash flow generation and credit metrics, based on stable-to-improving cost
structures and deleveraging through volume growth and margin expansion.
We consider a variety of oil and natural gas price scenarios to
test the survivability and relative positioning of E&P companies.
Additional scrutiny is given to the volume forecasts and credit metrics in the
next 12-24 months, particularly if bridge liquidity or capital market access to
refinance near-term maturities are viewed as concerns.
A deeper look at the impact of lower oil prices and their impact
on E&P issuers can be found in the report "High Yield E&P Scenario
Analysis," published today at www.fitchratings.com.