Fitch Ratings Ltd., Chicago, expects further credit-quality weakening for US oil and gas companies and service firms as low commodity prices continue to batter industry financial performance.
In a semiannual report, Fitch assumes average prices of $55/bbl this year and $57.50/bbl next year for West Texas Intermediate crude oil and $4.25/Mcf this year and $5/Mcf next year for gas at Henry Hub in its base case.
In a "stress case," the price assumptions are $40/bbl this year and $42.50/bbl next year and $3.50/Mcf and $3.75/Mcf.
For upstream companies, Fitch expects weaker cash flows and declining credit metrics following a period of increased leverage in the first half of 2009. But it expects free cash flows of producers to begin recovering because of declining drilling and service costs, "which should enable upstream companies to return to more reasonable profit and cash flow levels as we move into 2010."
The firm says some companies reduced debt while oil and gas prices were high and thus can manage the downturn "from a position of strength."
Weak product demand, low capacity utilization rates, and compressed crude-quality differentials have hurt refiners, Fitch notes. Collapse of the value spread between low and high-quality crudes has eroded the feedstock-cost advantage of high-conversion refineries.
"Fitch anticipates that overall refining sector credit metrics will remain weak in 2009 and into 2010," the report says. In the first half, it adds, crude prices have become "somewhat decoupled from underlying product demand in North America," increasing enough to represent a "rising threat" to refiners.
Despite the weakening, which Fitch expects to continue until global product demand recovers, the firm calls the credit quality of the US refining industry "reasonable."
Fitch expects service companies and drilling contractors to remain under pressure to lower rates and therefore to have to cut their own costs as contract revenue backlogs shrink.
It expects firms with deepwater drilling operations and international diversification to benefit because margins for these businesses exceed those for companies confined to US markets and drilling contractors with "more commoditized" rigs.
