REUTERS
Fitch Ratings has lowered the oil and natural gas price assumptions it uses to rate energy companies, reflecting our view that prices are increasingly unlikely to recover this year, according to the company's press release published on February 24.
"Our new base case is for Brent and WTI oil prices to average $35 a barrel (bbl) in 2016. We also assume a Henry Hub natural gas price of $2.25 per thousand cubic feet (mcf) for the year. We had previously expected oil to average $45/bbl and U.S. natural gas to average $2.50/mcf. Our long-term base case price assumptions are unchanged at $65/bbl and $3.25/mcf, respectively," the report says.
According to Fitch, the reduction is due to a combination of stock build-up over the mild winter, higher-than-expected OPEC production in January and increasing evidence that global economic growth for the year will be weaker than we previously forecast. This suggests there will still be a supply surplus in the second half of 2016, albeit reduced from current levels, and that markets will probably only reach a balance in 2017. Even then, very high inventories will limit price increases.
"We will assess the impact on rated companies over the next few weeks. Companies with limited liquidity, which will be more stretched in 2016 and 2017 than previously forecast, are the most likely to face a negative rating action. Our through-the-cycle ratings methodology means that any actions on better-funded, investment-grade corporates will be based on their financial and operating profiles in the medium term," the report reads.
"Rating through-the-cycle means we hold companies to relatively conservative metrics for a given rating in the middle of a business cycle on the understanding that financial profiles will worsen in cyclical dips. Rating actions are less likely if we expect companies to have profiles consistent with their current rating when the cycle normalizes. For oil and gas companies our focus is currently on profiles in 2018."
"This through-the-cycle approach is predicated on the company surviving the cycle. When assessing whether it will, we focus on liquidity and look at outcomes under our base price deck and our more conservative stress case deck," Fitch said.
Fitch has also revised down the price assumptions for this stress case, which now assumes oil prices of $25/bbl in 2016, rising to $40/bbl in the long-term. The price assumptions were previously lowered in January.