S&P warns it will not hesitate to dock ratings for oil groups

Emergency cash-conservation measures taken by Occidental Petroleum and other energy companies may not be enough to stave off credit-rating downgrades, S&P Global has warned, saying it is prepared to take rapid action as it takes stock of the damage of coronavirus and the oil-price war between Saudi Arabia and Russia.

The New York-based rating agency said on Wednesday that it was reviewing its assessments of energy groups after a severe sell-off across markets that raised doubts over the ability of companies to service and refinance their debts. 

Michael Grande, a senior director at S&P Global, said the rating agency would not hesitate to respond if credit quality deteriorated. “We are not going to be as patient as we were before,” he said, referring to trouble in energy markets five years ago.

In a call with investors, Thomas Watters, a managing director at S&P Global, listed Warren Buffett-backed Occidental, Oklahoma-based Devon Energy and oil producer Hess Corporation, among companies that could lose their coveted “investment-grade” ratings of triple B and above. He cautioned that final decisions had not yet been made in the review, which S&P hopes to complete by the end of the month. 

“We are not definitively saying that any of these credits are going to slip out of investment grade,” said Mr Watters. “Merely we are highlighting that currently these are some of the credits that relative to their peers have higher debt leverage, maybe weaker credit ratios or a weaker hedge book. It’s a possibility.”

Triple B-rated Occidental, which last year bought Anadarko in a $55bn deal, slashed its dividend on Tuesday for the first time since 1991 as it prepared for a prolonged price slump. “Its debt leverage is a bit rich maybe for the rating,” Mr Watters said.

He added that companies with ratings below investment grade, often referred to as junk, could be in line for “multiple notch downgrades”, due to the large volumes of debt coming due soon.

Energy groups have been squeezed by a big drop in demand for both oil and natural gas stemming from the outbreak of coronavirus, which has led to lockdowns and travel bans all over the world. Talks to cut oil production in an effort to support prices broke down last week after Russia baulked at a deal with some of the biggest oil-producing nations. 

Saudi Arabia is now planning to boost its output to put pressure on Moscow — an act that has sent prices into a tailspin and dealt a severe blow to the US shale-oil industry. 

Borrowing costs for junk-rated energy companies in the US have risen to their highest levels since January 2016, when a series of defaults ricocheted through the market after a steep decline in oil prices. 

Both Mr Grande, in charge of midstream energy companies and refiners, and Mr Watters, who looks after upstream companies and oilfield services, said they doubt companies will be able to depend on sales of assets or access to capital markets to raise cash in the near term. It leaves fewer options for energy companies than four or five years ago. 

“Capital markets were a lot more accepting than they are now,” said Mr Watters. “As part of our analysis this time around if issuers are planning to issue equity, which we deem to be unlikely, or sell assets, given the current environment going on, we will be a lot more sceptical and probably have less patience.”

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