Fitch: $50 Crude Stress Study Flags Risk in Leveraged E&P Firms
05 March 2015 - 3:16AM
Business Wire
Most global exploration and production (E&P) companies
exhibit broadly similar risk characteristics in a prolonged $50
West Texas Intermediate (WTI) crude oil price scenario, according
to a recent Fitch Ratings analysis. However, some differences in
leverage and asset profiles help explain variation in these firms'
ability to withstand a lengthy crude price shock.
A recent Fitch analysis of sensitivity to an extended crude oil
price shock employed a simplified graphical approach to mapping
relative vulnerability across a disparate set of issuers. Risks for
a large sample of corporate, sovereign, and public finance issuers
were measured with respect to two parameters: 1.) expected revenue
and EBITDA declines and 2.) leverage.
The oil price sensitivity scatter plot can be seen here.
Among the issuers represented in the cross-sector scatterplot,
those in the lower left quadrant are likely to be most affected by
sustained lower oil prices given their relatively weaker debt
positions and greater revenue or EBITDA exposure in a $50/bbl
environment. By contrast, issuers in the upper right quadrant are
better positioned than their peers, both in terms of debt profiles
and revenue/EBITDA impact. High yield issuers are highlighted in
the plot. Notably, almost all of the issuers located in the high
sensitivity portion of the chart (lower left) are rated below
investment grade by Fitch.
The two metrics used in generating the corporates' sensitivity
scatterplot were FFO leverage (x-axis) and expected changes in
EBITDA (y-axis). E&P companies in the corporate space showed
modest variation in their sensitivity to a $50/bbl oil price
scenario, with much of the variation explained by differences in
asset profiles and balance sheet leverage.
Highly rated corporates like Occidental (issuer default rating
[IDR] of 'A') and other low leveraged IG companies such as
Southwestern Energy Corp (IDR of 'BBB') show the greatest
resilience in the face of extended revenue and EBITDA pressure in a
$50 WTI environment. Besides lower leverage, some of the
better-placed issuers (including Southwestern (95% gas) and
Chesapeake (71% gas) are less exposed to a prolonged oil price
slump. Liquids-heavy names such as Hess, Pioneer, and Anadarko are
more exposed to EBITDA declines in a low-price scenario, pushing
them into a higher risk section of the Fitch sensitivity plot.
Most of the high yield names in the sample (Chesapeake Energy,
Energy XXI, Newfield Exploration, and Unit Corporation) are plotted
further left on the chart, indicating higher leverage. Energy XXI
(B-/Negative) is an outlier on the chart, given its high FFO
leverage following its 2014 debt-funded acquisition of EPL Oil and
Gas.
Fitch's corporates sensitivity plot is part of a broader
cross-sector analysis of issuers' vulnerability to a prolonged $50
WTI price scenario. Analogous plots have been developed for a broad
sample of energy-dependent sovereigns and US states. The full
report, "Global Crude Fallout: Sensitivity to Prolonged Oil Price
Pressure Across Multiple Sectors," can be found at
www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch
Wire credit market commentary page. The original article, which may
include hyperlinks to companies and current ratings, can be
accessed at www.fitchratings.com. All opinions expressed are those
of Fitch Ratings.
Applicable Criteria and Related Research:
Global Crude Fallout (Sensitivity to Prolonged Oil Price
Pressure Across Multiple Sectors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862668
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Fitch RatingsBill WarlickSenior DirectorMacro Credit Research+1
312 368-3141orMark SadeghianSenior DirectorCorporates+1 312
368-2090orKellie NilsenSenior DirectorFitch Wire+1 212
908-9123orMedia Relations:Elizabeth Fogerty, New York, +1
212-908-0526Email: elizabeth.fogerty@fitchratings.com