Arenewed forecast of a "lower for longer" commodity price environmenthas Moody's again sounding alarms for stressed oil and gas companies.
Moody'soil and gas Liquidity Stress Index, measuring distressed debt among speculative-gradeissuers, reached a record 31.6% in March, surpassing the peak levels from the Great Recession.E&P companies saw a record high of 40.5% in April, while the overall oiland gas figure slipped to 29.5%.
"Wethink there's an elevated risk that [oil and gas companies] are going toviolate financial maintenance covenants over the next year," Moody'sSenior Vice President John Puchalla said in an interview. "Covenantpressures are not as widespread, except in the energy sector."
Among53 speculative-grade companies with the weakest score for the covenantcomponent of Moody's liquidity analysis, 38 were oil and gas entities, at theend of the first quarter, Puchalla and his colleague Tom Marshella found,according to a May 3 note.
Moody'sreported downgrading 124 oil and gas companies stemming from a review of 195energy firms between December 2015 and March.
"Thereviews reflect our view that a 'lower for longer' commodity price environmentwill prevail over the next several years because of excess global supply,"the analysts said in the report.
"Therating actions are based on a resetting of [crude] price expectations,"Puchalla said in the interview, alluding to a forecast of $33, $38 and $43 perbarrel for 2016, 2017 and 2018 respectively. The agency had previously forecast$40, $45 and $50 per barrel for those years.
Whileenergy sector downgrades were seen to taperoff around mid-April, decliningproducer borrowing bases and the difficulties involved in securing favorableprices on hedges have pushed up Moody's indicator of default pressures.
Puchallaand his colleagues expect cash flow pressures from oil and gas companies tojack up the default rate among U.S. speculative-grade companies to 6% by theend of 2016, the highest level since July 2010.