What’s Driving the Oil and Gas Industry Credit Slide

Risk Insight Video & Blog Series: February 2016

The oil and gas industry still accounts for the bulk of global energy production.  While many people might protest the use of fossil fuels and their impact on the environment, the reality is that, without them, our cars would stay in the garage and our houses would be dark.  However, many people don’t fully recognize the enormous stress the industry is under and how various risk factors can affect it.

Today’s blog will focus on:

• S&P Global  Market Intelligence’s approach to the analysis of Industry Risk for the Oil and Gas Industry
• Second, a brief point about why Industry Risk matters
• Finally, current issues affecting the Oil and Gas “industry risk”

What is Industry Risk?At S&P Global Market Intelligence, the analysis of Industry Risk is a key component of the credit assessment of any obligor. Industry Risk affects all companies within a particular industry.

Among others, three key risk factors relevant to the “Oil and Gas Industry” include:

1. Industry profit margins;
2. Overall growth trends; and
3. The threat of substitute products or technologies.

You may ask: Why Does Industry Risk Matter?

Capturing “Industry Risk” is crucial to understanding the markets in which firms operate and how they impact a firm’s overall performance.

In the US, lending to the Oil and Gas industry increased substantially in recent years. However, market volatility and industry-wide credit downgrades prompted banks to revisit their lending standards. This is all a reflection of higher industry risk.

So, What is Driving the Oil and Gas Industry Credit Slide?

Industry profit margins shrunk as a consequence of lower prices. Taking the “Oil and Gas Exploration and Production” sector as an example, S&P Global Market Intelligence calculations show that the average “EBITDA (Earnings before interest, taxes, depreciation, and amortization) Margin” and “Total Revenues” declined by 18% and 28%, respectively, in 2015 alone.

In our view, the current environment combines a steeper-than-average cyclical downturn with a permanent shift in industry dynamics.

Watch Eduardo Alves’s video to further explore risk in the Oil and Gas industry.

Thank you for checking out the February 2016 installment of the Risk Insight Monthly Video & Blog Series! Check back here each month to read the latest Risk Insight blog and video. 

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