Twelve months or more of crude oil prices sustained at or below $45/bbl could pressure ratings at select high-yield issuers.
According to Fitch Ratings a sustained sub-$50 crude oil price scenario through 2018 will likely drive weaker operating profiles and lower production forecasts for some high yield oil exploration and production (E&P) companies, pressuring their ratings. Credit quality is expected to improve if prices remain at or above $50 per barrel.
However, twelve months or more of oil prices sustained at or below $45/bbl could pressure ratings at select high-yield issuers. Prolonged oil price pressure would likely worsen negative free cash flow profiles for more vulnerable E&P companies, with increasing calls on liquidity and the potential for lower EBITDA to push leverage above base case expectations.
In a sustained $40/bbl environment, operating conditions would be more challenging. Ratings could come under pressure during a shorter period (as little as 6 to 12 months) for firms with high exposure to oil prices, limited liquidity runways, or weak cost positions.
Fitch would expect any downgrades in an extended sub-$50/bbl scenario to be focused on E&P’s with weaker liquidity, higher full-cycle costs, and limited hedge protection.
Most high yield E&P issuers are likely to survive when oil prices remain above $50 per barrel. Survivors of the 2016 industry shake-out, when many high yield E&P companies filed for bankruptcy protection, generally continue to benefit from higher quality assets, good cost positions and lower debt levels than the debt-heavy players in the early shale period.