KBRA Releases an Updated View of Energy Firm Creditworthiness: Fundamentally Weaker or Battle-Tested?
October 18 2018 - 12:25PM
Business Wire
Kroll Bond Rating Agency (KBRA) releases a new research report,
An Updated View of Energy Firm Creditworthiness: Fundamentally
Weaker or Battle-Tested?
The collapse in energy prices in 2014 and 2015 derailed firms
that had aggressively leveraged to increase production based on
overly optimistic commodity price assumptions. One rating agency
dramatically re-rated the industry in 2016 based on an expectation
that challenging conditions would persist in the industry, thus
triggering a fundamental change in the industry’s ability to
generate cash flow. While the industry underwent a significant
competitive shakeout, KBRA believes fears of the industry’s demise
were overblown.
Rather than adopt a “guilty until proven innocent” approach to
evaluating the impact on the industry, KBRA believes that the
episode revealed that there was—and is—a broad spectrum of
firm-specific risk across the sector. Looking back, a review of
fundamental performance confirms as much.
Included in our report are a number of illustrative case studies
that highlight critical elements in asset quality and risk
management that proved to be instrumental in determining a
particular firm’s ability to withstand commodity price collapse.
Management teams that prudently managed operational and financial
risk proved able to power through and raise capital if necessary.
We believe the industry and its investors have learned from having
gone through the period, and that will positively shape some
behavior in the future. Accordingly, KBRA does not believe that
there has been a fundamental change in the industry’s ability to
generate cash flow.
KBRA believes price volatility is here to stay. We believe many
firms will adjust to this new normal by adopting more conservative
operating and financial practices. KBRA will keep management’s
strategy and actions at the core of its analysis—its rationale for
choosing its capital structure, and how it squares financial risk
with the expected cash flows from its assets. We will look to
understand management’s philosophy and practices regarding
liquidity, viewing positively management teams that focus on free
cash flow. Ultimately, each firm will find its own unique way to
reconcile stakeholder interests while managing risk.
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About KBRA and KBRA
Europe
KBRA is a full service credit rating agency registered with the
U.S. Securities and Exchange Commission as an NRSRO. In addition,
KBRA is designated as a designated rating organization by the
Ontario Securities Commission for issuers of asset-backed
securities to file a short form prospectus or shelf prospectus, is
recognized by the National Association of Insurance Commissioners
as a Credit Rating Provider, and is a certified Credit Rating
Agency (CRA) by the European Securities and Markets Authority
(ESMA). Kroll Bond Rating Agency Europe Limited is registered with
ESMA as a CRA.
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Kroll Bond Rating AgencyAnalytical Contacts:Corinne Hill, CFA,
Senior Director(646) 731-3331chill@kbra.comorAdam Gracely,
Analyst(646) 731-3329agracely@kbra.comorVan Hesser, Senior Managing
Director(646) 731-2305vhesser@kbra.com