Ratings agencies re-evaluate energy companies as commodity prices slide

When oil and gas prices go down, credit ratings hitch a ride.

After re-evaluating commodity price assumptions for the next several years, Standard & Poor’s Ratings Services shuffled through its deck of oil and gas companies and dealt dozens of downgrades last week.

Half of the 20 investment-grade oil and gas firms rated by S&P were downgraded, as were 25 of the 45 speculative-grade exploration and production firms.

About half of the oil and gas companies in the U.S. rated by the agency have a D- rating, indicating they are in default. There’s more of that to come, warned Tom Watters, managing director of U.S. Oil & Gas at S&P.

“We expect, given the rating portfolio this year, that number to continue to grow quite significantly,” he said during a webcast on Thursday.

In January, S&P lowered its price assumptions for the next three years — predicting $40-a-barrel oil and $2.50 per thousand-cubic-feet natural gas this year; $45 oil and $2.75 gas in 2017; and $50 oil and $3 gas in 2018. That triggered the reevaluations.

Mr. Watters said the low prices are being caused and exacerbated by a glut of oil and gas that isn’t subsiding as quickly as everyone hoped it would.

The agency put a negative outlook on Marcellus Shale producer Range Resources Corp. while keeping the company’s credit rating the same. Another Marcellus producer, Southwestern Energy Corp., got a credit downgrade and a negative outlook. 

S&P didn’t change the ratings of Downtown-based EQT Corp., Canonsburg-based Rice Energy Inc. and Denver-based Antero Resources. All three are considered to have a stable outlook.

Moody’s Investor Service finished its own review of 11 U.S. exploration and production companies last week, downgrading Range but sparing Antero.

In general, Marcellus players fared better than peers in other shale basins, and that’s not a coincidence. 

“We favor the Marcellus in Appalachia given the very low cost and the high production rates from the wells there,” said S&P director Carin Dehne-Kiley.

Nevertheless, lower commodity prices impact everything from how much money a company has to repay debt to how much a bank will lend in the future.

S&P analysts said that in the past 15 months, about 25 U.S. exploration and production companies had shown signs of distress, like missing a debt payment of filing for bankruptcy.

The biannual borrowing base re-determinations this spring — a time when banks decide if companies have enough earning potential and collateral to support their borrowing limits — is likely to push more companies into the distressed category, analysts said.

Already, Rex Energy Corp., a State College-based driller, had its base lowered by 43 percent. S&P analysts said they expected banks to lower the borrowing bases for companies by as much as 30 percent this year, in part as a reaction to declining oil and gas reserves.

EQT Corp. and Cecil-based Consol Energy Inc. reported decreases in their proved reserves as of the end of last year, which encompass both their developed and undeveloped properties. While both companies boosted their developed reserves, each saw a drop in the yet untapped oil and gas under lease.

So-called proved undeveloped reserves are those that are nearly certain to be underground and could technically be developed at current prices.

The price part of that equation caused Consol Energy to remove 32 percent of its reserves from the calculation. The company simply didn’t see a way to make the economics work so Consol decided it couldn’t drill for that gas in the next five years.

Anya Litvak: alitvak@post-gazette.com or 412-263-1455.

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