Moody's outlines likely ratings impacts from oil price, virus crises

The balance sheets of oil and gas firms across Latin America are under historic strain with the COVID-19 emergency and plummeting oil prices, and ability to continue borrowing in the coming months seems critical for survival, especially for smaller O&G outfits.

With likely downgrades in the offing, the following are key takeaways from Moody's March 20 report "Low oil prices persisting for longer would imply additional risk for producers":

"In our base case scenario, we expect that the effects from the virus will persist into the second quarter of 2020, with improving economic fundamentals in the second half of the year.

The large integrated oil companies have demonstrated resilience in previous downturns, which should temper the degree of negative rating actions." 

The ratings agency also said that tor investment-grade exploration and production (E&P) companies it would expect mostly negative outlooks as well as possible reviews for downgrades, given that E&P ratings have been lower heading into the current problems than in 2015-16.

Meanwhile, Moody's thinks that speculative-grade E&P companies are less resilient to a low oil price environment because they are "smaller and less diversified, have less liquidity, and their access to the capital markets is quite limited."

The firm also pointed out that while credit metrics will likely weaken for national oil companies, their ratings will still be linked to their respective sovereign sponsors "and we are unlikely to downgrade them imminently." 

"The midstream sector has only limited direct commodity-price exposure, but as this downturn persists, the produced volumes of oil, natural gas and natural gas liquids will drop, reducing both revenue and earnings," the agency said. 

The demand for refined products has dropped steeply as a result of the slowdown in economic activity and "This drop in activity will hurt the downstream refining and marketing sector, but refining companies will offset some of this loss through reduced feedstock costs from lower oil prices," it added.