TEXT-S&P: Canadian E&P cos feel impact of liquid price volatility
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 firstname.lastname@example.org. 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.
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