TEXT-S&P: Canadian E&P cos feel impact of liquid price volatility

Wed Nov 28, 2012 12:32pm EST
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Nov 28 - Pricing pressure on Canadian crude and natural gas liquids will
continue to stress exploration and production (E&P) companies' credit measures
over the next 12-18 months, according to a report published today by Standard &
Poor's Ratings Services. The commentary, "Liquid Price Volatility's Impact On
Canadian Exploration And Production Companies Could Spur More Negative Rating
Actions", notes that we expect liquids' prices to remain weak, which could have
a credit impact on E&P companies with significant gas production.

Similar to WTI and Canadian crude, natural gas liquids (NGLs) prices were 
strong until mid-2011. However, lighter NGLs (propane and ethane) prices 
started to weaken in late 2011 due to increasing supply in NGL production as 
exploration and production companies shifted production to liquids-rich plays, 
as well as decreasing NGL demand in 2012 following the downtime in many North 
American processing facilities. 

"Even though we expect NGL demand will improve as the plants come online, we 
still expect the increased NGL supply will continue to pressure prices," said 
Standard & Poor's credit analyst Aniki Saha-Yannopoulos. 

In the commentary, Standard & Poor's notes that a contrast exists between 
oil-focused and natural gas-focused companies. "Given the much stronger oil 
price relative to natural gas, we assess companies with a higher proportion of 
oil in their reserves and production mix to be better competitively 
positioned," added Ms. Saha-Yannopoulos. 

We expect companies with high exposure to weak natural gas prices to fund 
capital programs through debt, either by borrowing under the credit facilities 
or accessing the capital markets. We also expect the sustained lower natural 
gas prices to lead to borrowing base reductions--which could limit liquidity 
for speculative-grade issuers. Natural gas companies with a strong balance 
sheet, significant gas production hedged at above market prices, or 
substantial noncore assets available for sale are more likely to retain our 
ratings through the current natural gas downcycle than their highly leveraged, 
unhedged, liquidity-constrained peers.

The report is available to subscribers of RatingsDirect on the Global Credit 
Portal at www.globalcreditportal.com. If you are not a RatingsDirect 
subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 
or sending an e-mail to research_request@standardandpoors.com. Ratings 
information can also be found on Standard & Poor's public Web site by using 
the Ratings search box located in the left column at www.standardandpoors.com.