Slow Oil Price Recovery Heightens Upstream Default Risk

Slow Oil Price Recovery Heightens Upstream Default Risk
Oil price collapse is putting dozens of E&P companies at risk of debt default.

The default rate among the exploration and production (E&P) sector’s weaker companies is expected to more than double during the next 12 months, according to a new report from Moody’s.

Energy prices slow recovery is putting those companies at greater risk, David Keisman, Moody’s senior vice president said in a statement. The credit agency estimates the one-year portfolio average default rate will increase from 2.7 percent to 7.4 percent.

“The companies on the lower end of spec-grade ratings are the ones that should be most worried,” he said.

At the beginning of May, 15 percent of all oil and gas companies had a credit rating of B3 or lower. That’s the largest share of any U.S. sectors in the ratings. Moody’s focused on the 48 struggling E&P companies with a rating of B2 or lower that could face default.

“Given the relatively small size of the portfolio, there is a risk the forecast could worsen,” the report said.

Driven by the collapse in oil prices, Moody’s has forecasted that fundamental business conditions for the E&P and oilfield services sectors would be negative through the first half of 2016. After next year, Moody’s expects a gradual recovery in oil prices to stabilize in the $70 to $75 per barrel range.

But there is an upside. Moody’s said the negative credit migration has been concentrated in lower-grade group; higher spec-grade ratings companies have managed to navigate the troubled market, generally by cutting capital expenditures, running only the highest quality rigs and selling lesser assets.


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