Standard & Poor’s has announced:
- S&P Global Ratings lowered its West Texas Intermediate (WTI) and Brent crude oil price assumptions on March 19, 2020, which initiated a global review of its rated oil and gas issuers.
- We lowered our 2020 WTI price to US$25 from US$35 and lowered our Brent price to US$30 from US$40.
- The reduced 2020 price assumptions, in conjunction with the lower 2021 and 2022 prices published on March 9, translate into materially lower revenue and cash flow forecasts for Husky.
- Our projected three-year (2020-2022) weighted-average funds from operations (FFO)-to-debt and discretionary cash flow (DCF)-to-debt ratios have weakened relative to those we previously forecast.
- S&P Global Ratings revised its outlook on Husky to negative from stable and affirmed its ‘BBB’ long-term issuer credit and senior unsecured debt ratings on the company.
- The negative outlook reflects S&P Global Ratings’ view that there is increased risk Husky’s cash flow metrics could deteriorate below the minimum level required to support the ‘BBB’ credit rating.
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While we acknowledge the counterbalancing benefits of the company’s downstream segment, including midstream assets, the upstream segment’s revenues and profitability continue to dominate the company’s credit profile. Moreover, the company’s heavy oil-dominant upstream product mix exposes its financial performance to additional volatility, given the persistent weakness of Canadian heavy oil prices.
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We would lower the rating to ‘BBB-‘, if Husky’s weighted-average FFO-to-debt ratio decreased below 30%, and we expected the cash flow ratio would remain at this weakened level for a sustained period. Nevertheless, we believe Husky’s participation in several industry sectors, and the integration benefits of its downstream operations, should continue to support an investment-grade rating.We would revise the outlook to stable, if Husky is able to improve and sustain its three-year weighted-average FFO-to-debt ratio at the upper end of the 30%-45% range. In the absence of material operating efficiency gains, we believe this ratio improvement would only occur in tandem with strengthening hydrocarbon prices.
Several other ratings actions were taken on Canadian oil companies:
- Cenovus downgraded one notch to BBB-, Negative Outlook
- Canadian Natural Resources downgraded one notch to BBB, Stable Outlook
- Suncor downgraded one notch to BBB+, Stable Outlook
- Ovintiv Canada LLC downgraded one notch to BBB-, Negative Outlook
Husky remains with its Issuer Rating of BBB, although the Outlook has now turned negative. The preferreds remain at P-3(high).
Affected issues are HSE.PR.A, HSE.PR.B, HSE.PR.C, HSE.PR.E and HSE.PR.G .
James, Why are safe preferreds being slaughtered as well? My RBC PREF SHARES SERIES W is getting creamed. Is it cause of the expected inflation from the money printing?
Thx
F. Sabagh
Why are safe preferreds being slaughtered as well
The answer is the same as the answer to the question “why are seniority spreads blowing out?”
As long as new issues need to be priced related to the seniority spread, prices of existing preferreds need to trade cheaper. The interesting bit here is there has only been 1 new issue since last May! This tells me the market is broken (existing prefs are trading against phantom new issues) and James’ suspicion that selling begets more selling is probably correct.
I think this gets fixed partly through supply and demand. Supply of prefs ought to shrink through NCIB/SIBs and a lack of issuance. Demand ought to increase because the yields are just too damn high – where else can investors find yield with overnight bank rates at zero or lower?
My apologies to all for messing up the italics. I keep messing up the very simple html markings. I think I’ll just go back to good old “italics”.
Two words: Risk premium
In early Feb, people did not see enormous risk in the system and as a result wanted to pay $25 for RY.PR.W. I was one of them. They were content with the coupon of 4.9% from RBC.
Today, I bought the same issue for $20.xx. Why? Today the yield is 6% and change.
Because the risk premium is high. Investors want a greater reward for holding the same security because the risk of loss is high. Volatility is also high. Uncertainty around us is high. Recession is a given. Depression is a non trivial probability.
So new money going into the ‘system’ generates greater reward for the investors.
It’s now manifesting in almost all asset classes other than US treasuries of short duration, which have a negative yield upto 3 months.
At this time, the market is pricing the perpetuals way better than the resets. It may or may not change depending on the outcome of the epic battle between the Covid 19 and Central Bankers and Governments of the world combined. We’ll see how it plays out. So far the virus is winning handily.
RY.PR.W is a very peculiar issue. Nobody is sure whether or not it’s a DeemedRetractible.
However, it is behaving normally as a Straight Perpetual, indicating that the market thinks that RY will assign the conversion rights to OSFI, as happened with a trio of CM issues.
Is it cause of the expected inflation from the money printing?
That would be at variance with the accepted wisdom on the slaughter of FixedResets, which asserts that the problem is due to rates going negative in a big way.
It is my view that Straights have decoupled from any kind of fundamental analysis and are instead taking their lead from FixedResets. Which makes no sense, of course, but nothing in this market makes sense.