Things are looking bleaker and bleaker on the oil patch, according to Standard & Poor’s (registration required). It downgraded credit ratings on 10 US oil and gas firms (knocking three of them into junk-debt status), gave three a negative outlook, and put three more on notice with negative implications.
Back in January, S&P cut its 2016 crude oil price forecast to $40 a barrel from $50-$55 a barrel, so this isn’t a surprising development. Neither is it surprising that energy companies might soon have trouble paying their bills. Hess had to cut its already-shrunken capital spending budget for 2016 by 40%, and BP just reported its worst annual loss ever.
But adding insult in to injury, US benchmark West Texas Intermediate has this week given up a big chunk of the gains it had racked up on since-dashed hopes among investors that there might be a chance Russia and OPEC could come to an agreement on production cuts. Prices spiked a bit today (Feb. 3) because the dollar weakened on some lousy US economic data, but things aren’t quite where they were a few days ago.
Oil and gas companies issued more than 9% of all bonds issued last year, down from the 13% they accounted for in 2012 but far higher than the 4% portion they had in 2000.
Investors started worrying late last year about an oil-linked collapse in junk bonds, but it’s important to note that this isn’t the only kind of debt they’ve been racking up. All of the companies affected by S&P’s are, or up until today had been, investment grade.