Despite Lifting Of Export Ban, Moody's "Bombshell" Sparks Panic In Energy Credit Markets

The Senate and House passed the spending bill this week, which the President signed into law on the same day. Embedded in the law is a provision to lift the 40-year old crude export ban. The lifting of the crude export ban is a historic milestone, but seemingly less relevant for US E&Ps, Midstream and Oilfield Services as compared to a year and a half ago when WTI-Brent spreads were close to $9.00/bbl vs. the current spread of $0.80/bbl. Nevertheless, there is still a negative long-term impact on refiners should spreads re-widen.

As BofAML notes,

Moody’s dropped a bombshell on the market this week as it lowered its oil and natural gas price deck and subsequently placed 29 investment grade and BB rated US E&P companies under review for possible downgrades. The review reflects Moody’s expectations that industry fundamentals will remain weak through at least 2017. Moody's expects to conclude most reviews over the next several months. Companies may be downgraded 1-2 notches and some ratings could be confirmed as well. Moody's continues to assess single B and lower rated companies. We believe the price deck outlook will also have ramifications for Oilfield Service Ratings.

Looking into 2016, we expect additional downgrades, which could lead to $30bn+ of Investment Grade Energy bonds falling into the High Yield Index if prices remain weak. Notably S&P and Fitch would have to take similar actions for falling angel scenario to play out.

 

US high yield energy underperformed this week The BofAML US HY Energy Index sharply underperformed the BofAML US HY Master II Index this week, returning -5.4% vs. -1.4%. The underperformance was led by E&Ps and OFS, which returned -8.1% and -4.3%, respectively. Midstream & Distribution and Refining underperformed more modestly, returning -3.0% and -1.7%, respectively. Within the high yield energy space, single B rated energy performed the worst returning -6.7%, with by C rated and BB rated, returning -6.1% and -4.5%, respectively. These returns significantly underperformed the broader high yield market as C, single B and BB rated high yield returned -2.4%, -1.3% and -1.1%, respectively. Energy equities also significantly underperformed the broader market driven by E&Ps, Midstream MLPs and Oilfield Services returning -10.7%, -6.6% and -5.5%, respectively, vs. -0.5% for the S&P 500 while Refiners underperformed less dramatically, returning -2.9%.

 

The news this week that Moody’s has made a sharp reduction to its oil and natural gas price assumptions is a pre-cursor to a series of negative credit rating actions, in BofAML's view. They anticipate a combination of outright downgrades and/or changes in outlooks to negative that could exaggerate the spread widening seen among investment grade producers over the past few weeks.

In other words, the credit crisis just spread contagiously from HY to IG...