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The 12-month default rate forecast for Oil and Gas companies rated B2 or below in the Exploration and Production (E&P) sector is estimated to more than double in the year ahead, Moody's Investors Service said in a new report.
Moody's default-forecasting model estimates that the one-year portfolio-average baseline default rate for these companies will increase from 2.7% to 7.4%.
"With a gradual recovery in energy prices, the weaker oil & gas issuers are at a much greater risk of default," said Moody's Senior Vice President David Keisman. "The companies on the lower end of spec-grade ratings are the ones that should be most worried."
As of May 1, 2015, the oil and gas sector comprised 15% of companies rated B3 or lower -- the largest share for any sector included on this list of ratings across US corporate sectors, Moody's Associate Analyst Julia Chursin states in the report, "Oil and Gas: The Bad, Ugly and Good." The percentage is nearly double the 8% of oil and gas companies that occupied the list of US companies rated B3 negative or lower a year ago.
In contrast, the report also notes that, as of the end of April 2015, over 70% of US E&P companies rated B1 or below had maintained their ratings or had been upgraded since June 2014.
"The oil and gas industry is characterized by boom and bust cycles, and many US E&P companies with experienced management teams have seen this game before," said Senior Vice President Pete Speer. "While these companies have successfully navigated the waters thus far, low oil prices will continue to pressure the industry-at-large and these companies' credit metrics."
