Moody's Just Put Over Half A Trillion Dollars In Energy Debt On Downgrade Review
One week ago, in the aftermath of the dramatic downgrade to junk of Asian commodity giant Noble Group, we showed readers the list of potential "fallen angel" companies, those "investment "grade companies (such as Freeport McMoRan whose CDS trades at near-default levels) who are about to be badly junked, focusing on the 18 or so US energy companies that are about to lose their investment grade rating.
Perhaps inspired by this preview, earlier today Moody's took the global energy sector to the woodshed, placing 175 global oil, gas and mining companies and groups on review for a downgrade due to a prolonged rout in global commodities prices that it says could remain depressed indefinitely.
The wholesale credit rating warning came alongside Moody's cut to its oil price forecast deck. In 2016, it now expects the Brent and WTI to average $33 a barrel, a $10 drop for Brent and $7 for WTI.
Warning of possible downgrades for 120 energy companies, among which 69 public and private US corporations, the rating agency said there was a "substantial risk" of a slow recovery in oil that would compound the stress on oil and gas firms.
As first reported first by Reuters, the global review includes all major regions and ranges from the world's top international oil and gas companies such as Royal Dutch Shell and France's Total to 69 U.S. and 19 Canadian E&P and services firms. Notably absent, however, were the two top U.S. oil companies ExxonMobil and Chevron.
Moody's said it was likely to conclude the review by the end of the first quarter which could include multiple-notch downgrades for some companies, particularly in North America, in other words, one of the biggest event risks toward the end of Q1 is a familiar one: unexpected announcements by the rating agencies, which will force banks to override their instructions by the Dallas Fed and proceed to boost their loss reserves dramatically.
What Moody's admitted is something profound, and which not even the equity holders of many energy companies have realized, namely that "Even under a scenario with a modest recovery from current prices, producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows," it said. This means far less value going to equity as the companies lurch ever deeper into financial distress, unless of course oil does rebound back to $100, which paradoxically can only happen - if only briefly - after a massive default wave (which ultimately will lower the all in cost of production).
Worse, Moody's also said that it sees "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."
But the most dire warning from the rating agency which is suddenly showing far more perceptiveness than is typical, is the admission that China, as a source of global debt-funded demand, is no more:
"Moody's believes that this downturn will mark an unprecedented shift for the mining industry. Whereas previous downturns have been cyclical, the effect of slowing growth in China indicates a fundamental change that will heighten credit risk for mining companies."
Moody's is of course right, which is why we expect it will downgrade "investment-grade" rated copper-trading giant Glencore, whose bonds reflect a CCC rating at best, momentarily.
Meanwhile, here are the 69 US, 19 Canadian and 13 European companies (the full list of all global companies can be found here) that just Moody's black list, a grand total of 101 companies which now face a downgrade threat on just about $540 billion in total debt.
We can only hope none of the soon to be downgraded companies have downgrade-activated collateral triggers, as suddenly what was until recently a terrible liquidity picture in the US energy space (as per the Schlumberger conference call) is about to get far worse.
Below we list the US, Canadian and European companies, alongside their total debt, that are currently evaluated for downgrade by Moody's.
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