Seven American energy companies are on the boundary between investment and speculative corporate-level credit ratings, according to a Moody's report.
Those companies are in what Moody's analysts recently called a "crossover zone." Roughly 30% of the rating agency's covered energy companies in the Americas are either rated Baa3 with a negative outlook or Baa3 with a review for downgrade — those most at risk of becoming speculative grade — and companies rated Ba1 with a positive outlook or Ba1 with a review for upgrade, indicating a potential transition to investment grade, the analysts said in a Sept. 9 report.

Investment-grade candidates within two notches of the investment-grade boundary include Anadarko Petroleum Corp., which Occidental Petroleum Corp. bought in August, and Canada's Encana Corp., which acquired Texas-based Newfield Exploration Co. in February.
"The energy industry is primed for further mergers and acquisitions, and for industry consolidation. The large number of companies near the crossover zone raises the prospect that events will prompt further movement within or near the zone," analysts at Moody's wrote.
Exploration and production sector consolidation, in particular, would support "increased scale, optimization of drilling activities, shared infrastructure, a larger base over which to spread fixed costs, and better bargaining positions with service companies and suppliers — all of which generally benefit credit quality," they added.
At the other end of the spectrum, midstream services provider Buckeye Partners LP — whose acquisition by a fund managed by Australia's IFM Investors could "significantly inflate" the master limited partnership's leverage — could be on track for a downgrade to speculative territory, according to the report. Uncertainty surrounding the new leadership's financial policies combined with persistently weak commodity prices could justify a similar downgrade for shale gas driller EQT Corp.
Of the four companies that have crossed the investment-speculative boundary so far in 2019, three were upgrades to be considered investment grade. Kinder Morgan Inc. and Pembina Pipeline Corp.'s Ruby Pipeline LLC was the only company to lose its investment-grade rating. Moody's cited the bankruptcy of California's largest utility and Ruby's biggest customer, Pacific Gas and Electric Co., as a potential negative impact on re-contracting capacity or renegotiating rates.
Moody's said 30 other companies are approaching the crossover zone, 70% of which are in either the midstream or upstream sectors.
