Just 10 days after "Moody's Put Over Half A Trillion Dollars In Energy Debt On Downgrade Review", moments ago S&P decided it wanted to be first out of the gate with a wholesale downgarde of the US energy companies, and announced that it was taking rating actions on 20 investment-grade companies, including 10 downgrades.
The full release is below:
Standard & Poor's Ratings Services said today that it has taken rating actions on 20 investment-grade U.S. oil and gas exploration and production (E&P) companies after completing a review. The review followed the recent revision of our hydrocarbon price assumptions (see "S&P Lowers its Hydrocarbon Price Assumptions On Market Oversupply; Recovery Price Deck Assumptions Also Lowered," published Jan. 12, 2016).
While oil prices deteriorated over the past 15 months, the U.S.-based investment-grade companies we rate had been largely immune to downgrades. However, given the magnitude of the recent reductions in our price deck, most of the investment-grade companies were affected during this review. We expect that many of these companies will continue to lower capital spending and focus on efficiencies and drilling core properties. However, these actions, for the most part, are insufficient to stem the meaningful deterioration expected in credit measures over the next few years.
A list of rating actions on the affected companies follows.
DOWNGRADES
Chevron Corp. Corporate Credit Rating Lowered To AA-/Stable/A-1+ From AA/Negative/A-1+
The downgrade reflects our expectation that in the context of lower oil and gas prices and refining margins, the company's credit measures will be below our expectations for the 'AA' rating over the next two years. We anticipate Chevron will significantly outspend internally generated cash flow to fund major project capital spending and dividends this year and generate little cash available for debt reduction over the following two years. We note that the company has significantly more debt than in the last cyclical downturn while oil and gas production are at similar levels. The stable outlook reflects our expectation that credit measures will improve over the next three years assuming lower capital spending and higher commodity prices.
EOG Resources Inc.: Corporate Credit Rating Lowered To BBB+/Stable/A-2 From A-/Stable/A-2
The downgrade reflects increased leverage following the reduction in our oil and natural gas price assumptions, along with lower capital spending and a slight production decline in 2016. We now expect funds from operations (FFO)/debt to fall and remain below 45% over the next two years, which we view as too low for an 'A-' rating, given the company's strong business risk profile. The stable outlook reflects our estimate that FFO/debt will approach 30% in 2016 and improve thereafter as commodity prices rise under our price deck assumptions. We apply a one-notch uplift to the anchor for comparable rating analysis, given that EOG's leverage is lower than many of its 'BBB' rated peers.
Apache Corp.: Corporate Credit Rating Lowered To BBB/Stable/A-2 From BBB+/Stable/A-2
The downgrade reflects increased leverage following the reduction in our oil and natural gas price assumptions, along with lower capital expenditures and a modest year-over-year production decline in 2016. We now expect FFO/debt to fall and remain below 30% over the next two years, levels we view as too low for a 'BBB+' rating, given the company's strong business risk profile. The stable outlook reflects our estimate that FFO/debt will approach 20% in 2016 and improve thereafter as commodity prices rise under our price deck assumptions.
Devon Energy Corp.: Corporate Credit Rating Lowered To BBB/Stable/A-2 From BBB+/Negative/A-2
The downgrade reflects our expectation that in the context of lower oil and gas prices, the company's credit measures will be below our expectations for the 'BBB' rating through 2018. Devon outlined steps to reduce debt following acquisitions announced in December 2015, including selling assets. However, we anticipate that the company will outspend internally generated cash flow over the next two years without further limiting capital spending or reducing dividends. The stable outlook reflects our expectation that Devon's credit measures will improve over the next three years under our rising commodity price assumptions.
Hess Corp.: Corporate Credit Rating Lowered To BBB-/Stable/-- From BBB/Stable/--
The downgrade reflects our expectation that in the context of lower oil and gas prices, the company's credit measures will be below our expectations for the 'BBB' rating over the next two years. Hess enters 2016 with ample liquidity, including $2.7 billion in cash and has sharply curtailed capital spending. However, we forecast that the company will outspend internally generated cash flow to fund capital spending and dividends through 2018. The stable outlook reflects our expectation that credit measures will improve over the forecast period. We note that proceeds from assets sales, operating cost reductions, or other sources of funding could provide an opportunity to improve the company's balance sheet.
Marathon Oil Corp. Corporate Credit Rating Lowered To BBB-/Stable/A-3 From BBB/Stable/A-2
The downgrade reflects our expectation that in the context of lower oil and gas prices, Marathon's credit measures will be consistently below our expectations for the 'BBB' rating. Marathon enters 2016 with ample liquidity, including $1.2 billion in cash and has substantially reduced capital spending and dividends. We estimate that the company will outspend generated cash flow to fund capital spending and dividends this year and that cash flow coverage of debt has declined meaningfully. The stable outlook reflects our projections that credit measures will improve over the next two years. We note that proceeds from assets sales or other external sources of funding could provide an opportunity to improve the company's balance sheet.
Murphy Oil Corp.: Corporate Credit Rating Lowered To BBB-/Stable/-- From BBB/Negative/--
The downgrade reflects our expectation of increased leverage and worsening credit measures following the reduction in our oil and natural gas price deck assumptions. Despite the company's recent reduction in planned capital spending for 2016, we expect debt to EBITDAX to remain above 2x and FFO to debt below 30%, which we view as too high for a 'BBB' rating, given the company's satisfactory business risk profile. The stable outlook reflects our expectation that debt to EBITDAX will remain below 4x under our base case assumptions.
Continental Resources Inc.: Corporate Credit Rating Lowered To BB+/Stable/-- From BBB-/Stable/--; Recovery Rating '3' (high end of the range) assigned.
The downgrade reflects our expectation of increased leverage and worsening credit measures following the reduction in our oil and natural gas price deck assumptions. Despite Continental's reduction in capital spending for 2016, we expect FFO to debt to fall below 20% and debt to EBITDAX to exceed 4x over the next two years. We view these credit measures as too high for a 'BBB-' rating, given what we view the company's business risk profile as satisfactory. We now view Continental Resources' financial profile as aggressive. We also assigned a '3' (high end of the range) recovery rating to the company's senior unsecured notes.
Hunt Oil Co.: Corporate Credit Rating Lowered To BB+/Negative/-- From BBB-/Negative/--
The downgrade reflects our expectation that in the context of lower oil and gas prices, Hunt Oil's credit measures will be below our expectations for the 'BBB-' rating over the next two years. In addition, the company is challenged by continued suspension of liquefied natural gas (LNG) shipments from Yemen due to ongoing fighting in the country. Hunt has an interest in the Yemen gas liquefaction plant and receives substantial distributions when the project is operating. The negative outlook reflects the likelihood that we will lower the rating if we do not expect LNG shipments from Yemen to resume by end of third quarter of 2016, or other factors occur that result in weaker than currently anticipated credit measures.
Southwestern Energy Co.: Corporate Credit Rating Lowered To BB+/Negative/B From BBB-/Stable/A-3; Recovery Rating '3' (low end of the range) assigned.
The downgrade reflects our expectation of increased leverage and worsening credit measures following the reduction in our oil and natural gas price deck assumptions, and incorporates our assumption of significantly reduced capital spending and a moderate production decline in 2016. We now expect FFO to debt to fall and remain below 20% over the next two years, which we view as too low for a 'BBB-' rating, given that we view the company's business risk profile as satisfactory. We now view Southwestern Energy's financial profile as aggressive. We also assigned a '3' (low end of the range) recovery rating to the company's senior unsecured debt. The negative outlook reflects the potential for a downgrade if we no longer expect FFO/debt to improve to above 20% in 2018.
LONG-TERM CORPORATE CREDIT RATING PLACED ON CREDITWATCH WITH NEGATIVE IMPLICATIONS; SHORT-TERM RATING AFFIRMED
Exxon Mobil Corp.: 'AAA' Corporate Credit Rating Placed On CreditWatch With Negative Implications; 'A-1+' Short-Term Rating Affirmed
The CreditWatch placement reflects the expectation that credit measures will be weak for the ratings through 2018 under our price assumptions. We will assess management's financial policies and strategies for mitigating the potential impact of the downturn, as well as review the company's 2015 financial results and the implications for credit quality. We currently expect to resolve our review within 90 days. We currently anticipate that if we lower ratings, we would not lower them by more than one notch.
RATINGS PLACED ON CREDITWATCH WITH NEGATIVE IMPLICATIONS
ConocoPhillips: 'A' Long-Term And 'A-1' Short-Term Corporate Credit Ratings Placed On CreditWatch With Negative Implications
The negative CreditWatch placement reflects the potential that we could lower ratings over the next 90 days pending a review of expected 2016-2018 financial results, and ConocoPhillips' ability to fund expected negative free cash flow without materially increasing debt leverage. We currently expect to resolve our review within 90 days. We intend to review the company's ability to achieve expected cost savings and substantial asset sales and its ability to lower capital spending without significantly affecting production levels.
Newfield Exploration Co.: 'BBB-' Corporate Credit Rating Placed On CreditWatch With Negative Implications
The CreditWatch placement reflects our expectation that credit measures will be weak for the current rating over the next one to two years. We will assess management's financial policies and strategies for mitigating the potential impact of lower commodity prices over the next several weeks, as well as review the company's 2015 financial results and the implications for credit quality. We expect to resolve the CreditWatch placement within 90 days. We currently anticipate that if we lower the ratings, we would not lower them by more than one notch.
RATINGS AFFIRMED; OUTLOOK REVISED
Anadarko Petroleum Corp.: 'BBB' Corporate Credit And 'A-2' Short-Term Ratings Affirmed; Outlook Revised To Negative From Stable;
The outlook revision reflects increased leverage following the reduction in our oil and natural gas price assumptions, along with lower capital spending and a modest year-over-year production decline in 2016. The negative outlook reflects our estimate that FFO/debt could fall below 20% and debt/EBITDAX could exceed 4x for a sustained period if the company does not complete additional noncore assets sales, as we currently anticipate.
National Fuel Gas Co. (NFG): 'BBB' Corporate Credit Rating And 'A-2' Short-Term Ratings Affirmed; Outlook Revised to Negative From Stable.
The negative outlook reflects our expectation that the company's credit measures will be weak for the ratings over the next two years because of lower oil and gas prices. NFG has curtailed E&P spending, but we expect spending and dividends to exceeds internally generated cash flow over the next two years, in part, due to investment in a pipeline expansion. We forecast that the company's credit measures will return to acceptable levels for the rating in 2018 due to higher expected commodity prices, increased E&P production, and lower capital spending.
Noble Energy Inc.: 'BBB' Corporate Credit Rating Affirmed; Outlook Revised To Negative From Stable
We revised our rating outlook to negative from stable, reflecting our expectation that credit measures will remain weak for the ratings over the next one to two years. Although we expect the company to remain cash flow neutral for the year under our revised price assumptions, we expect FFO/debt to remain below 30% in 2016 and 2017, and adjusted debt/EBITDA to rise slightly above 3x in 2017, but we believe both measures will improve in 2018. We could lower the rating if we project that the company will sustain adjusted debt/EBITDA above 3x for a prolonged period.
RATINGS AFFIRMED
Occidental Petroleum Corp.: 'A' Corporate Credit Rating And 'A-1' Short-Term Rating Affirmed; Outlook Stable
We have affirmed the ratings on Occidental, reflecting our expectation that the company will continue to maintain conservative financial policies such that FFO/debt will average above 60% through 2018, albeit modestly below 60% in 2016. Our expectations include the receipt of about $1 billion from Ecuador in 2016 for the recent settlement awarded by the International Centre for Settlement of Investment Disputes, which is a key support underlying our expectations. Cash flows are supported by the start of the Al Hosn gas project in the United Arab Emirates and the low decline rate of the company's Permian enhanced oil recovery operations.
EQT Corp.: 'BBB' Corporate Credit Rating Affirmed; Outlook Stable
We have affirmed the ratings on EQT, reflecting our expectation that it will continue to maintain conservative financial policies, such that FFO/debt will not fall below 45% for a sustained period. EQT should continue to benefit from its midstream operations that allow it to capture more favorable pricing to help buffer the negative price differentials typical of Marcellus shale producers.
Cimarex Energy Co.: 'BBB-' Corporate Credit Rating Affirmed; Outlook Stable
Although credit measures should weaken for Cimarex Energy Co. in 2016 under our revised price assumptions, we expect them to remain adequate for the rating. We project FFO/debt above 40% in 2016 and commit the majority of its capital in the Permian and the Mid-Continent region, albeit at reduced levels in response to the current hydrocarbon prices. The stable outlook reflects our view that the company's leverage will improve in 2017 and liquidity will remain strong.
Pioneer Natural Resources Co.: 'BBB-' Corporate Credit Rating Affirmed; Outlook Stable
The affirmation reflects our view that Pioneer will maintain FFO/debt above 45% over the next two years, as it continues to invest and grow production in the Permian Basin. Our estimates incorporate the reduction in our oil and natural gas price assumptions, a modest year-over-year increase in capital spending, about 10% production growth in 2016, and the company's recent $1.4 billion equity offering.