Oil, gas companies default may double: Moody’s

OREANDA-NEWS. May 20, 2015. The default rate of oil and gas companies may double in the next 12 months because of a prolonged low-price outlook for crude, Moody's Investors Service said.

A default-forecasting model of Moody's estimates that oil and gas companies with B2 rating or below may see an increase in the default rate from 2.7pc currently to 7.4pc in the next year. A B2 rating is just two steps above default.

A steep fall in oil prices since the June 2014 highs on the back of rising supplies and weak demand has pushed smaller US shale producers such as American Eagle Energy and Quicksilver Resources into bankruptcy. Large companies like Apache, Anadarko and Occidental Petroleum have written down assets worth billions of dollars and posted losses in the first quarter.

As of 1 May, oil and gas companies comprised 15pc of all those rated B3 or lower — the largest share for any industry included on the list across the US corporate sector and nearly double the 8pc for the sector a year ago. Oil and gas has driven the growth in the list of companies with B3 or lower ratings, it said.

"With a gradual recovery in energy prices, the weaker oil and gas issuers are at a much greater risk of default," Moody's senior vice president David Keisman said. "The companies on the lower end of spec-grade ratings are the ones that should be most worried."

The list of companies whose ratings have worsened during the last few months, described by Moody's as negative credit migration, has also expanded. The list is mostly of companies that already had lower credit ratings, with inferior assets and over leveraged balance sheets.

"If oil prices do not rebound as expected or prices move lower, then we expect further downward pressure on companies already on the list and additions from downgraded companies being added," it said.

But Moody's also said producers with higher rating have so far been able to navigate the difficult market conditions by cutting capital expenditures and operating only in areas that offer the best returns.

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Companies with a B debt rating are considered speculative and subject to high credit risk, according to Moody's definitions. C ratings are the lowest class and are typically in default, with little prospect of recovery of principal or interest. Aaa is the highest quality, with minimum credit risk. Within each of these categories, Moody's adds modifiers 1, 2 and 3 with 1 indicating the higher end in that category.