Regional risks linger for energy in 2020, rating outlooks vary
The global oil and gas sector outlook is stable, but the risk of downgrades exists for some companies, particularly in North America and Latin America, says Fitch Ratings.
Bifurcated market access and weak natural gas prices are elevating refinancing risk in North America, while macroeconomic challenges and expected issuer-specific credit deterioration are causing the rating trajectory in Latin America to remain negative.
Market access for high-yield exploration and production (E&P) and oil field service companies in North America remains spotty, while most investment-grade and ‘BB’ category issuers retained good access.
Companies such as Unit Corporation with significant upcoming maturities could be challenged by limited capital market access.
Within Europe, PGS ASA is on Rating Watch Negative because of poor liquidity and a recent unsuccessful refinancing attempt.
“We lowered our Henry Hub price assumption to US$2.50/mcf beginning in 2020 due to strong supply growth from associated shale gas (primarily Permian), which we expect will continue to pressure the US gas complex over the next few years.
“Other considerations included a track record of limited production discipline by Appalachian Basin producers, a slower than expected ramp in Mexican take-away capacity, and a trend of high recent injections into US underground storage. The US-China trade war and slowing global GDP growth were additional factors.”
According to recent US Energy Information Administration data, Permian natural gas production rose to 16.5 bcfd in December, up 3.2 bcfd from a year ago and 7.1 bcfd from two years ago.
“Price sensitivity for much of the gas produced in the Permian is limited, given its by-product nature, as the economics for most Permian-based drilling programmes are based on oil and liquids.” As long as oil prices remain supportive, Fitch expects Permian producers will continue to step up gas production as new take-away capacity comes online.
“We are forecasting a marginally negative trajectory for Latin American oil and gas ratings to continue in 2020 as more than one-third of Fitch-rated issuers have a Negative Rating Outlook.
“PEMEX and Ecopetrol are national oil companies that could be affected by sovereign downgrades. Ecopetrol’s Negative Outlook aligns with Colombia’s Sovereign Outlook.
“However, PEMEX’s Negative Outlook reflects potentially continued deterioration in its standalone credit profile. PEMEX is underinvesting in its E&P business and paying elevated taxes. The Rating Outlook for Mexico is Stable.”
Regional sector outlooks reflect industry fundamentals. North America is experiencing a divergence in oil and gas price expectations, slowing US production growth and increasing operating efficiencies.
In Latin America, half-cycle costs are expected to remain low and aggregate production to decline marginally.
European majors have strong project pipelines and continue to focus on reducing costs. The performance of gas-heavy E&P companies will depend on the pace of the market recovery, pricing mechanisms, and hedging.
Natural gas prices in Europe should improve in 2020 as global liquid natural gas demand catches up with recently increased supply and the market slowly rebalances.
Sovereign-related issues will remain a major credit driver for many companies in Russia and the Middle East.
Most Asia-Pacific national oil companies face challenges from declining domestic production, given maturing oilfields; therefore, capex spending is expected to remain high.
Oilfield service providers in China should continue to benefit from higher domestic upstream activities.
Source: Oil & Gas Journal