Oil and Gas Industry Largely Unaffected By Credit Turbulence
The North American oil and gas industry has mostly avoided the fallout of the credit turbulence of recent months and its overall liquidity position remains sound, according to Moody’s Investors Service.
In a Special Comment, The Oil & Gas Industry: Calm In The Credit Storm, Moody’s says the industry has largely retained access to the capital markets, including the commercial paper market, helped by historically high commodity prices, strong cash flows and elevated asset values. In addition, near-term debt maturities are manageable and most companies have long-term committed facilities from banks.
At the lower end of the rating scale, however, some exploration and production companies could face borrowing base re-determination issues if natural gas prices continue to decline, which would then have a follow-on effect for the drillers and oilfield services companies, Moody’s notes.
We caution that even if commodity prices remain supportive, a protracted credit squeeze would likely have a spillover effect on the oil and gas industry.
Other key points of report:
- Weaker companies that depend particularly heavily on continued access to capital would face a liquidity squeeze and possible ratings downgrades if general liquidity conditions tightened and reduced their ability to fund capital projects.
- Some companies that may need waivers for covenant violations would be exposed over the near-term. However, Moody’s doesn’t expect this to become an industry issue unless the credit market disruption drags into 2008.
- Liquidity for the refining and marketing sector is supported by strong cash flow that is due to continued high crack spreads, very strong oil prices, and historically high asset valuations.
- In the master limited partnership space, the market turbulence has not affected M&A activity. The equity markets continue to be open to MLPs at this time, Moody’s says.
The full report, which includes a summary of recent financing transactions, can be purchased here.
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