Low Natural Gas Prices Hurting E&P and Service Companies
Exploration and production (E&P) and oilfield service companies are suffering the effects of low natural gas prices, according to Standard & Poor’s.
Natural gas prices have fallen to the $3-$4/per million Btu (mmBtu) range in recent months after reaching a high of more than $13 mmBtu in July (Henry Hub).
Although companies in the oil and gas sector are accustomed to hydrocarbon price volatility, the prolonged decline in natural gas prices since the summer of 2008 has created new hurdles.
Lower natural gas prices hurt ratings on E&P companies for several reasons:
- Lower operating cash flow. Because of the hydrocarbon price declines and E&P companies’ innate high leverage, cash flows have fallen significantly in recent quarters.
- Financial covenants. As a direct result of lower cash flows, some companies are facing greater challenges in complying with financial covenants, such as debt to EBITDA tests.
- Reduced borrowing bases. Most speculative-grade companies’ (those rated ‘BB+’ or below) borrowing bases are re-determined semi-annually. As commercial banks lower their pricing assumptions, borrowing bases could decline, potentially causing liquidity constraints.
For details see Credit FAQ: How U.S. Exploration And Production And Oilfield Service Companies Are Coping With Lower Natural Gas Prices. The report answers frequently asked questions by investors about the implications of lower natural gas prices for E&P and oilfield service companies’ credit quality.
In a related report S&P sees Tough Times Ahead For European Oil and Gas Refiners
European refining activities are now exposed to what we think will be a prolonged refining downturn.
“Strength in diesel and gasoline cracks has switched around compared with 2008, and European players risk suffering the most in 2009. Visibility for oil service companies is also low as pricing pressures have increased and demand remains uncertain. Upstream-focused oil and gas companies are showing resilience, though, as evidenced by reasonable first-quarter results. ”
CreditSights has updated its Oil & Gas Capital Structure Update, which includes recent reports, earnings expectations, credit ratings, valuation comparisons, and performance comparisons.
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