Investments in US exploration & production firms resilient despite low oil, gas prices – Fitch

Oversupply has worked its way into refined products, affecting US refiners’ profitability and utilization

CHICAGO – The US investment- grade exploration and production (E&P) sector has weathered the two-year commodity price downturn mostly unscathed, according to Fitch Ratings’ North American Exploration and Production Handbook.

Most companies in Fitch’s monitored universe had stable or higher amounts available under revolving credit facilities, and many were able to use non-core asset sales to bolster liquidity.

Supermajors led capital market access, with Chevron Corporation (CVX) and ExxonMobil Corporation (XOM) issuing a combined $15 billion in debt in the first-half of 2016, either to fund dividends and capex at integrated level or pre-refinance debt.

Equity issuance was also widely used to execute M&A, improve liquidity, and/or fund 2016 spending plans.

Traditional E&P companies have dominated acquisition activity, and many were focused on improving the size and quality of their core U.S. shale positions.

Private and financially backed acquirers seemed to be more opportunistically focused, with transactions observed across a variety of basins/regions.

Fitch also observed only three offshore transactions within its sample, suggesting that offshore assets are currently out of favor with many buyers.

However, low oil prices have had a significant effect on sector cash flow and leverage profiles.

The investment- grade E&P sector saw median debt/EBITDAX triple to 3.1x since second-quarter 2014.

Fitch views 2017 as an inflection year where a rising price environment will combine to bring leverage metrics below cyclical peaks.

Absent a prolonged downturn in commodity prices, Fitch expects the majority of investment-grade energy companies will be spared further material credit downgrades as they work to manage leverage and free cash flow profiles.

Increasing crude imports have more than offset YoY production declines among lower 48 crude oil, maintaining upward pressure on US crude stocks and keeping a lid on crude price.

Through Aug. 29, spot crude oil prices at Cushing, OK have averaged $41/bbl. Fitch’s current base case oil price for 2016 is $42/bbl.

Inventories across the North American petroleum complex remain elevated. The US had 31 days of supply of crude oil on hand in Aug. 2016, around 40 per cent above the long-term mean of 22 days.

That oversupply has worked its way into refined products, affecting US refiners’ profitability and utilization.

Summer utilization rates should remain below the five-year mean, questioning refiner’s ability to put a meaningful dent in crude stocks absent further help on the product demand side.