Ratings agency Standard & Poor’s has cut its price assumptions for crude oil for the second time this month, raising the prospect that companies will face further pressure on their credit ratings as their creditworthiness is tested against the lower prices.
Just three weeks after the last cuts in price assumptions for crude oil fed through to a cut in the rating of Santos, the estimates have been further reduced by about $US10 a barrel, with S&P citing the “precipitous declines” in future prices.
S&P said on Wednesday it will now assume a price of $US70 a barrel for Brent crude oil in 2015, instead of $US80, and $US75 a barrel in 2016, instead of $US85.
For the US benchmark West Texas Intermediate, the assumed price is now $US65 a barrel for 2015 and $US70 for 2016.
Those new levels are still well above current levels for crude futures, with Brent at about $US60 a barrel on Wednesday, while WTI was about $US55.40.
“Over the coming weeks, we will be updating our forecasts, and we anticipate a number of corporate rating actions in the upstream and oil field service sectors,” S&P said.
“However, any such actions also depend on company-specific factors, including our other rating assumptions and issuers’ flexibility to adapt to lower prices, hedge positions, and liquidity. We anticipate few immediate sovereign rating changes as a direct consequence of these updated price assumptions.”
Santos had its BBB+ credit rating cut to BBB on December 8 after the last downgrade to S&P’s oil price assumptions. While the company said it had plenty of cash and debt capacity to fund its capex obligations, investors marked the shares down on concern it would be unable to avoid an equity raising to beef up its balance sheet should S&P again lower its price assumptions, and its rating was further reduced, to just above investment grade.
S&P said on Wednesday that while it recognised current oil prices were even significantly lower than its new assumptions, it expected “some stabilisation and ultimate recovery” as oil companies curb production of high-cost wells and defer capital spending. Uncertainty also remains as to future decision on production made by the Organisation of Petroleum Exporting Countries, it noted.
It expects US shale development drilling to be cut back next year if WTI prices remain below $US75 a barrel, slowing production growth and ultimately supporting prices. It pointed to estimates by consultancy Bentek, which estimates that a 10 per cent cut in annual drilling activity would result in a 4 per cent reduction in production growth in six key US shale plays next year, and a 6 per cent reduction in 2016. A 25 per cent cut in spending would result in reductions of 11 per cent in 2015 and 16 per cent in 2016. Lower prices also render many deep water oil fields less economically viable, it noted.
“We do not foresee a dramatic drop in near-term US crude production, but we believe the rate of investment in growth is likely to slow with prevailing spot and futures prices,” S&P said.
Longer term assumptions for both Brent and WTI crude were left unchanged at $US85 a barrel and $US80 a barrel, respectively.