Not all is well in Big Oil, or at least, not all is what it once was. The upstream oil and gas arena continues to face significant pressure from falling energy resource pricing, runaway capital spending projections and conditions that may not subside anytime soon.
At the heart of the problem is OPEC’s strategy to maintain market share, apparently at all costs, which is different than the cartel’s efforts in previous cycles to support the price. Though upstream industry constituents have announced capital spending reductions and some have idled rigs, commercial inventories of crude oil remain at decade highs, and risks to the global economy, not the least of which from China (FXI), Brazil (EWZ), and Australia (EWA), threaten the demand profile for crude oil and refined products.
Some time ago, we highlighted our concerns about the relevance of credit ratings in today’s market environment (see here), and October 4 brought news that S&P was reevaluating the credit assessments of a number of upstream players, including the very largest. The rating agency noted that “most rating actions reflect lower credit-protection measures, negative cash flow, and uncertainty about liquidity over the next 12 months.”
Rating downgrades across the industry included Chesapeake Energy (CHK), Whiting Petroleum (WLL), Ultra Petroleum (UPL), Denbury Resources (DNR), Linn Energy (LINE), Bill Barrett Corp (BBG), Endeavor Energy Resources (END), Legacy Reserves (LGCY), Triangle US Petroleum (TPLM), Chaparral Energy (CPR), Templar Energy, Atlas Resource Partners (ARC), Clayton Williams Energy (CWEI), Midstates Petroleum (MPO), Energy XXI (EXXI), and American Energy—all of which are now deeper into junk territory.
Importantly, S&P noted that it revised the credit outlook from stable to negative for the following companies, Exxon Mobil (XOM), Chevron (CVX), Northern Oil and Gas (NOG), EV Energy Partners, Fieldwood Energy, as it reaffirmed the ratings of ConocoPhillips (COP), WPX Energy (EVEP), W&T Offshore (WTI), and Comstock Resources (CRK). We inevitably believe that Exxon Mobil’s pristine AAA credit rating will be revised lower at some point during this energy bear market, and we expect rating action on Chevron’s debt far sooner. The latter’s much-championed net cash position has now ballooned into a large net debt position, less supported of a strong AA, in our view.
Our favorite diversified oil giant remains Exxon thanks in part to its resilient Dividend Cushion ratio. We value shares in the mid-$80s, and we would not be surprised to see momentum carry it beyond those levels. We hold the Energy Select Sector SPDR Fund (XLE) in the Dividend Growth Newsletter portfolio to hedge against any firm-specific income risks as credit conditions continue to deteriorate.