Moody's downgrades 8 US E&Ps as oil falls

OREANDA-NEWS. February 16, 2016. Ratings agency Moody's downgraded top Bakken producer Whiting Petroleum and seven other US independents as part of a review of the industry.

In all, 11 companies with existing Ba ratings were reviewed. A Ba rating implies substantial credit risk.

"The drop in oil prices and weak natural gas prices has caused a fundamental change in the energy industry, and its ability to generate cash flow has fallen substantially," it said. "Moody's believes this condition will persist for several years."

The ratings downgrades are a further setback to an industry already grappling with worsening balance sheets as a drop in crude prices below \\$30/bl to near 13-year lows squeezes cash flows. Weak credit ratings increase borrowing costs and made defaults more likely. Downgrades are sweeping across the industry, from majors such as Chevron and Shell to smaller independents, as the oil price outlook remains bleak amid abundant supplies.

In 2014 Whiting agreed to buy Kodiak in an all-stock transaction valued at \\$6bn, making it the largest producer in the Bakken shale basin in North Dakota. It agreed to shoulder Kodiak's \\$2.2bn in debt and fork over \\$3.8bn in stock. But in October last year, it wrote down the value of the Kodiak assets by \\$870mn and took a \\$2.6bn impairment on its own assets. It also sold assets worth \\$400mn up to October 2015.

"While we recognize the steps that Whiting has undertaken in response to weak pricing levels, we believe the ability to further adjust to a lower price environment will be more challenging and the timing and execution of assets sales more uncertain," Moody's gave as the rationale for lowering its rating to Caa1 from Ba2, a five-notch drop. A Caa rating implies very high credit risk.

WPX Energy, which on 9 February said it sold its natural gas assets in Colorado's Piceance basin for \\$910mn, got downgraded to B2 from Ba1, a four-notch drop, on "expectation that the company's cash flows and credit metrics will worsen in 2017 when its hedged production volumes decline," it said. While asset sales will allow it to reduce debt, they will also result in smaller output.

QEP Resources was downgraded to B1 from Ba1, a drop of three levels, because of its "capital intensive process of transition" toward a more balanced mix of oil and gas output in the current price environment.

Unit Corporation fell to B2 from Ba3, SM Energy fell to B2 from Ba1, Range Resources to Ba3 from Ba1, Newfield Energy to Ba3 from Ba1 and Energen to B1 from Ba1.

Moody's kept its ratings unchanged for Antero Resources (Ba2), Concho Resources (Ba1) and Hilcorp Energy (Ba1).