HSE On Review-Negative at DBRS

DBRS has announced (on March 26) that it:

has placed all its North American oil and gas (O&G) issuers and oil field service (OFS) issuers Under Review with Negative Implications. The portfolio review was undertaken in response to the recent extreme price declines and heightened volatility in crude oil and petroleum product markets largely caused by the rapid global spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil price war between OPEC (led by Saudi Arabia) and Russia. Because of the very high level of volatility and uncertain length of time for which weak crude oil and petroleum product markets will persist, the following DBRS Morningstar-publicly-rated North American issuers (11in this press release) have been put Under Review with Negative Implications:

— Chevron Corporation*
— Imperial Oil Limited**
— ConocoPhillips*
— Suncor Energy Inc.**
— Husky Energy Inc**
— Canadian Natural Resources Limited**
— Cenovus Energy Inc.**
— Ovintiv Inc.**
— CES Energy Solutions Corp.**
— Crew Energy Inc.**
— Source Energy Services Canada LP and Source Energy Services Canada Holdings Ltd.**

The Under Review with Negative Implications status accounts for DBRS Morningstar’s view that because of (1) the extreme decline in the price of crude oil and petroleum product prices; (2) the significant rise in market volatility; and (3) the considerable uncertainty regarding the demand outlook for crude oil and petroleum products, DBRS Morningstar expects issuers’ credit profiles to experience considerable downward pressure over the weeks and months to come although the full extent of the recent shock to crude oil and petroleum product markets has yet to be established. The Under Review with Negative Implications status generally reflects DBRS Morningstar’s belief that downgrades for at least a significant part of the portfolio is likely. However, as situations and potential rating implications may vary, the final rating determination may change from the initial assessment. The Under Review with Negative Implications status is generally resolved with a rating action within three months. However, if heightened market uncertainty and volatility persists, DBRS Morningstar may extend the Under Review status for a longer period of time.

Crude oil is the feedstock for refiners. Historically, for integrated companies, an oil price decline caused upstream profitability to shrink, but resilient profitability from refining (downstream) operations provided a partial offset or buffer to total integrated company margins. However, in the current situation, demand destruction for petroleum-derived products has been so sudden and severe that the squeeze on refining margins and falling demand is forcing operators to cut refining runs. Simply stated, the diversified model has not provided the same margin protection that integrated companies have historically enjoyed. Despite this, DBRS Morningstar expects that when economic activity rebounds and demand for lower-priced gasoline, jet fuel, and other refined products bounces back, downstream profitability will recover before the upstream business.

Currently, reduced capex programs being implemented or proposed by issuers that DBRS Morningstar has reviewed appear to be below what is needed to sustain their base level of operations. Lastly, the current ability to sell assets and tap equity or debt markets to raise cash is considerably more challenging relative to the 2014–16 market environment.

DBRS Morningstar believes that the current, very depressed price of crude oil for producers is unsustainable over the long term. Current pricing does not provide an adequate economic return for much of existing production and certainly not for new developments. Inevitably, the lack of investment will cause global oil production volumes to decline. In particular, DBRS Morningstar expects U.S. shale oil volumes to materially drop due to the steep decline rates typically associated with this kind of production. Furthermore, the depressed oil price may eventually inflict enough financial pain on Saudi Arabia, other OPEC members, and Russia to compel them to cooperate. A renewed OPEC plus production cut agreement would help to stabilize the market and accelerate price recovery.

DBRS Morningstar believes the WTI oil price will eventually recover to a midcycle range of USD 50/bbl to USD 60/bbl

Due to the drastic declines recently experienced by oil prices and the especially poor, near-term visibility regarding crude oil and petroleum product markets, DBRS Morningstar is placing all ratings for its North American rated O&G and OFS issuers Under Review with Negative Implications. DBRS Morningstar generally resolves the Under Review status within three months, assuming that greater clarity and stability returns to energy markets. With greater confidence about the direction of energy pricing and updated input from issuers regarding their immediate actions and longer-term plans, DBRS Morningstar will be in a better position to assess each issuer’s credit metrics. However, as denoted by the Under Review with Negative Implications designation, DBRS Morningstar notes that issuer credit profiles have weakened considerably and expects a number of negative rating actions.

This action was taken on the same day as S&P’s announcement of a Negative Outlook for HSE and downgrades for four other major Canadian producers.

Affected issues are HSE.PR.A, HSE.PR.B, HSE.PR.C, HSE.PR.E and HSE.PR.G .

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