(The following statement was released by the rating agency)
July 2 - Fitch Ratings believes the recent dip in crude oil prices could cause selective pressure points among issuers in the North American energy space, although current prices remain well above Fitch’s long-term price deck of $65/barrel. WTI crude -- one of the most closely watched commodities -- has recently traded below $80/barrel, and Brent has traded below $95/barrel, a stark contrast from pricing of more than $105/barrel and $125/barrel, respectively, seen earlier this year.
Falling crude oil prices, if sustained, could have a number of credit impacts across the energy space. For those exploration and production (E&P) companies making the transition from gassier reserve bases to more liquids-focused ones, lower prices are likely to put a damper on the speed of transition as the internal funding provided by existing oil production is reduced, increasing reliance on asset sales, capital markets funding, or other methods to offset lower realizations.
Low oil prices may also create pressure points for E&P firms with concentrated positions in shale, as capital spending in new shale positions can be “sticky,” especially new positions, both because of the need for forced leasehold drilling to retain acreage, and because the expected returns associated with new shale positions often rely on expected efficiency gains (lower cost wells, fewer days to completion, optimized frack stages, etc.), which are realized by keeping crews together and maintaining an active drilling program within a basin to move down the experience curve. A final pressure point from lower oil prices may come from dividends, especially those geared for higher oil prices. Although sustained lower prices are likely to bring eventual relief in the form of lower drilling and service costs, such relief may lag changes in pricing, creating an interim funding pressure.
Lower E&P capex should also have ripple effects felt at drilling and service companies, and other industrial providers to the space. (Caryn Trokie, New York Ratings Unit)