Moody's puts 175 ratings on review for possible downgrade after commodities rout

Royal Dutch Shell, Total SA and BP were among energy and mining companies whose ratings were placed on review

Jan 22, 2016 @ 8:46 am

Royal Dutch Shell, Total SA and BP, Europe's three biggest oil producers, were among 175 energy and mining companies whose credit ratings were placed on review for possible downgrade by Moody's Investors Service after cutting its forecasts for crude prices.

The 120 oil and gas sector companies included Statoil ASA, Eni SpA and Schlumberger Ltd., while Alcoa Inc. and Barrick Gold Corp. were among the 55 firms in the mining industry, Moody's said in statements on Friday. It reduced estimates for both West Texas Intermediate and Brent to $33 a barrel for 2016, cutting the two benchmark forecasts by $7 and $10 respectively, citing increased OPEC supplies and moderate consumption growth.

“Even under a scenario with a modest recovery from current prices, producing companies will experience much lower cash flows,” Moody's said in a statement commenting on Shell, Total and Statoil. “Today's review for downgrade considers that much weaker industry fundamentals have potential to warrant rating changes.”

Shell, Total and other oil companies have been battered by a more than 75% collapse in crude prices over the past 18 months amid a global supply glut and as China's economy slows. Shell, Europe's biggest oil producer, said this week it expects fourth-quarter profit to drop at least 42%.

(More: Buckle in for cheap oil)

FUNDAMENTAL SHIFT

In metals, "China's out-sized influence on the commodities market, coupled with the need for significant recalibration of supply to bring the industry back into balance indicates that this is not a normal cyclical downturn, but a fundamental shift that will place an unprecedented level of stress on mining companies,” said Carol Cowan, a Moody's senior vice president.

Raw materials have sunk to multi-year lows amid rising concern that slowing growth in China will hurt demand for energy to metals. Billionaire investor George Soros said this week that China's economy is headed for a hard landing in a slump that will worsen global deflationary pressures. The prospects of further rating cuts adds pressure to a resources sector that led global bankruptcies in 2015.

“This could have a larger impact on investment-grade companies rather than high-yield ones,” said Raymond Chia, head of credit research for Asia ex-Japan in Singapore at Schroder Investment Management Ltd., noting that junk-graded energy bonds are already trading at depressed levels after seeing downgrades over the last six months. “The key here is that we will have to see how many more forecast revisions there would be.”

MULTI-NOTCH DOWNGRADES

Multi-notch downgrades are particularly likely among energy issuers whose activities are centered in North America, where natural gas prices have declined dramatically along with oil, Moody's said in one of the statements. A majority of the reviews will be done by the end of the first quarter, it said.

China reported on Tuesday that gross domestic product rose 6.9% last year, the least since 1990. The same day, the International Energy Agency said global oil markets could “drown in oversupply,” sending prices even lower as demand growth slows and Iran revives exports with the end of sanctions.

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