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Royal Dutch Shell plc (ADR), Chesapeake Energy Corporation …

Royal Dutch Shell plc (ADR) (NYSE:RDS.A[1]), Schlumberger, Chesapeake and French oil giant, Total SA, are among the 73 Europe and US-based energy companies, whose credit ratings have been put on a review for downgrade by Moody’s Investors Service. The rating firm cited slow crude oil recovery and weak industry fundamentals as the main reasons behind the decision. As part of an on-going assessment of the oil and gas market, analysts at Moody’s have lowered their expectations for crude oil benchmarks. They now predict for the global benchmark, the Brent, and North American crude oil West Texas Intermediate (WTI), to average $33 per barrel this year. Previously, the agency had estimated Brent to trade at $43 per barrel and WTI to average $40 per barrel in 2016.

Moody s said[2]; We see a substantial risk that prices may recover much more slowly over the medium term than many companies expect, as well as a risk that prices might fall further. In the past few weeks, crude oil prices have dropped significantly, as OPEC and non-OPEC producers fight for market share. Currently, US production exceeds the commodity demand by more than 2 million barrels per day (bpd). Moreover, now that western sanctions on Iran have been removed, it plans to increase its production by 500,000 bpd, therefore global crude oil production is expected to increase further. This will continue to burden crude oil prices in the coming few months. The rating firm said low crude oil and gas prices will further pressurize the cash flow position of exploration and production (E&P), and oilfield services companies. 2015 was a terrible year for most energy companies. Shell stock dropped 34% last year, while its liabilities increased substantially. The energy company reported its preliminary earnings results for fourth quarter fiscal 2015 (4QFY15) on January, 20. The finalized earnings are expected to fall within the $1.6 1.9 billion range, down more than 45% from $3.26 billion in 4QFY14.

Chesapeake Energy Corporation (NYSE:CHK[3]) stock dropped drastically by 77% last year. The shares are further down 16% year-to-date (YTD). Earlier this week on January 19, the stock dropped to its 16-year low, and became the worst performer on the S&P 500 Index, amidst the crude oil prices crash. The company s debt-to-asset ratio has increased from 28% in 2014, to 54%, as of September 30, 2015.

Royal Dutch Shell Plc (ADR), Chesapeake Energy Corporation ...

At current crude oil prices, Moody s says most companies are finding it hard to fund capital projects. Last month, Shell cut its 2016 capital spending target by $3 billion, while Schlumberger Limited. (NYSE:SLB[4]), while releasing its 4QFY15 earnings yesterday, said it slashed capital spending by $100 billion. Furthermore, the rating firm said low crude oil prices are reducing the value of oil and gas assets, which resulted in huge impairment charges. Kinder Morgan Inc. (NYSE:KMI) reported impairment charges at $1.15 billion, and Schlumberger recorded the same at $2.14 billion in 4QFY15. Billions of dollars in impairment charges have worsened the oil corporations balance sheet position. The ratings agency said that during a commodity market downturn, integrated energy companies are in a stronger position to save their financial position, because they can earn high margins from the downstream sector. However, since companies in the upstream sector do not have an alternative for increasing sales revenues, their financial performance will remain dismal. Moody s added that even if crude oil prices recover slightly, these companies will continue to suffer cash flow problems.

The rating review of 4 European[5] and 69 American energy companies will focus on their cost structure, liquidity profile, returns, and credit metrics. It will also look at the management strategy and cash flow of the oil and gas companies. It is highly likely that if crude oil prices fall further, Moody s and other prominent rating agencies including Fitch and Standard & Poor’s (S&P), will put more energy companies on review for a downgrade.

References

  1. ^ NYSE:RDS.A (www.bidnessetc.com)
  2. ^ said (www.moodys.com)
  3. ^ NYSE:CHK (www.bidnessetc.com)
  4. ^ NYSE:SLB (www.bidnessetc.com)
  5. ^ European (www.moodys.com)



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