Moody’s cuts eight U.S. exploration and production companies, confirms two

By Tali Rackner

Norfolk, Va., Feb. 19 – Moody's Investors Service said it concluded rating reviews on nine Baa-rated U.S. exploration and production (E&P) companies, along with two associated midstream entities. The agency confirmed three companies' ratings and downgraded three companies' ratings one notch, two companies' ratings two notches, two companies' ratings three notches and one company's ratings four notches.

Oil prices have dropped substantially reflecting continuing oversupply in the global oil markets, very high inventory levels and additional Iranian oil exports coming on line. Furthermore, North American natural gas and natural gas liquids prices remain quite weak.

Moody's downgraded Anadarko Petroleum Corp.’s senior unsecured ratings to Ba1 from Baa2 with a negative outlook and assigned a Ba1 corporate family rating. The downgrade reflects the company's substantially lower forecasted cash flow generation under Moody's commodity price estimates, high debt levels relative to cash flow and Moody's expectation of some production declines caused by reduced capital investment.

The agency also lowered Western Gas Partners, LP’s senior unsecured ratings to Ba1 from Baa3 with a negative outlook, consistent with the downgrade of parent company Anadarko Petroleum, and assigned a Ba1 corporate family rating. Western Gas' ratings are supported by its high proportion of fee-based revenues that provides revenue stability, good commodity and basin diversification, and relatively low financial leverage.

In addition, Moody’s downgraded Continental Resources, Inc.’s senior unsecured notes rating to Ba3 from Baa3 and assigned a Ba3 corporate family rating. The Ba3 corporate family rating reflects the company's high level of debt, elevated leverage metrics, geographic concentration, and the lack of oil hedges in the current depressed crude oil price environment.

It also cut Hess Corp.'s senior unsecured rating to Ba1 from Baa2 and assigned a Ba1 corporate family rating with a stable outlook. The Ba1 corporate family rating reflects its geographically diversified, oil-weighted production and reserve base, which has been reconfigured into a pure play E&P portfolio of short-cycle, notably the Bakken Shale where Hess is the third largest producer, and long-cycle producing assets.

Moody’s downgraded Murphy Oil Corp.’s senior unsecured notes to B1 from Baa3, with a negative outlook, and assigned a Ba3 corporate family rating, which reflects higher financial leverage through 2017, with increasing debt balances and declining production.

The agency downgraded National Fuel Gas Co.’s senior unsecured rating to Baa3 from Baa2 with a stable outlook, reflecting weaker cash flow prospects from the E&P business segment, slower anticipated growth in midstream volumes and Moody's expectation of elevated financial leverage through 2017 as the company tries to balance its capital spending and dividends against operating cash flows.

Moody's downgraded Noble Energy, Inc. to Baa3 from Baa2 with a negative outlook, reflecting a gradual deterioration in the company's cash flow generation and credit metrics through 2017.

Finally, the agency lowered Southwestern Energy Co.'s senior unsecured notes rating to B1 from Baa3 and assigned a B1 corporate family rating. The B1 corporate family rating reflects Southwestern's low capital efficiency, which is highly levered to natural gas prices, elevated leverage metrics, and reserve concentration risk in the Fayetteville and Marcellus Shales.

In addition, the agency confirmed Cimarex Energy Co.’s Baa3 senior unsecured note ratings, EQT Corp.'s senior unsecured ratings at Baa3 and EQT Midstream Partners, LP’s Ba1 corporate family rating. The outlooks are stable.

Moody's lowered its oil price estimates on Jan. 21 and expects a slow recovery for oil prices over the next several years. For E&P companies, cash flow declines in tandem with oil and natural gas prices, with the decline weakening credit metrics and liquidity, and increasing their negative free cash flow.

The drop in energy prices and corresponding capital markets concerns will also raise financing costs and increase refinancing risks for E&P companies, the agency said.

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