The ratings outlook for most issuers of debt in the high-yield oil and natural gas sector is stable to positive, Moody's Investors Service, New York, says in a new report.
Analyst Andy Oram says he sees the potential for a range of high-yield upgrades, although ratings changes will also take into consideration cyclical commodity, financial, and asset markets. The more successful issuers will likely execute their strategies during the current up-cycle with the reinvestment opportunities and risks of the next down-cycle also in mind, he says.
"How the favorable outlook pans out in ratings will reflect performance trends born of productive recycling of cash flow and balanced growth, funding, and operating strategies, rather than simply cash flow and debt-coverage trends themselves, which can be inflated by surging up-cycle prices," Oram explains.
Underlying this relatively optimistic high-yield oil and gas sector rating are favorable fundamentals for the intermediate term. Moody's optimistic outlook applies broadly to exploration and production, drilling vessels, and oil field services, but more selectively with respect to refining and marketing.
Oram says the fundamentals for oil field services are firming, but shipyards that build vessels for the oil and gas industry, along with companies furnishing seismic services, face a slower recovery.
Refining and marketing have rebounded cyclically, Oram says, but inherent volatility, high leverage, eroding niche markets, challenging secular trends, and excess world refining capacity all influence the US market. In each of the oil and gas sectors, issuers that are still highly leveraged will need to make "substantive progress in reducing leverage to levels compatible with trough conditions," says Oram.
This year, oil and gas prices have remained exceptionally strong, and average prices for the year 2000 should be $2.90-3.00/MMbtu of gas and $23-25/bbl for West Texas Intermediate crude oil, says the report.
Moody's envisions supportive oil and gas price trading ranges through 2001, if demand remains firm and if the Organization of Petroleum Exporting Countries maintains effective discipline. Moody's assumes energy prices will probably trend downward near yearend, Oram says, adding that price softness towards the end of 2001 or in 2002 cannot be ruled out as strong prices spur robust worldwide exploration and production outlays.
