S&P: Most 1Q ratings actions in oil and gas industry were negative

Despite strengthening commodity prices during most of the first quarter, most rating actions in the global oil and gas industry were negative, Standard & Poor's Ratings Services reported.

May 7, 2003

2 min read

By OGJ editors

HOUSTON, May 7 -- Despite strengthening commodity prices during most of the first quarter, most rating actions in the global oil and gas industry were negative, Standard & Poor's Ratings Services reported.

Companies pursuing aggressive growth outweighed the number of companies exploiting strengthening cash flow to improve credit quality, the report said.

"This trend could reverse itself in 2003 if companies, particularly exploration and production (E&P) firms, can maintain spending discipline" and reduce debt, said S&P credit analyst Paul B. Harvey of New York.

The beginning of 2003 also saw increased merger and acquisition (M&A) activity.

"The ability of E&P companies in particular to lock in returns on acquisitions through hedging at robust commodity prices (especially natural gas), combined with low-cost debt, helped the increase in transactions. In addition, a lack of internal growth projects and a wealth of assets for sale should maintain an active level of M&A activity," Harvey said in the report, "First-Quarter Global Oil and Gas Ratings Round-Up."

Increased M&A activity is likely to continue given anticipated strong commodity prices, especially natural gas prices, and the amount of assets being divested recently by former energy traders and also refiners, he said.

The E&P sector stands to benefit "with the potential for ratings improvement where surplus cash flows are used to reduce debt levels or improve business positions," Harvey said.

"Companies that use the excess cash flows for sustained balance-sheet improvements are likely to see positive ratings actions. However, companies that are just preparing a war chest are less apt to see ratings improvement," Harvey said.