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.

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