Moody's Lower Oil Forecast to Accelerate Energy Firm Downgrades

  • Company puts 69 U.S. energy companies on negative review
  • Moody's cuts crude oil forecast to $33 a barrel for 2016

Moody’s Investors Service revised its price forecast for oil this year and started reviewing ratings of oil companies, joining Standard & Poor’s in predicting lower crude prices as S&P began downgrading firms in the sector.

Moody’s cut 2016 price estimates for West Texas Intermediate and Brent crude to $33 a barrel and predicted the price for both kinds of oil will rise $5 a barrel on average in 2017 and 2018. After the change, Moody’s put 69 exploration and production companies in the U.S. under review for downgrade. S&P changed its forecast for the price of both oil types to $40 on Jan. 12.

Further rating cuts add pressure to a sector that has already led global bankruptcies in 2015 as the price of Brent dropped 72 percent in the past two years. While the commodity has bounced more than 5 percent in the past two days, investors and lenders are bracing for another round of corporate failures. The four biggest U.S. banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- have set aside at least $2.5 billion combined to cover souring energy loans and have said they’ll add to that if prices stay low.

Credit Impact

“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, 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 forecasts revisions would there be.”

On Friday, S&P cut the rating on Santos Ltd. from Australia to the lowest level of investment grade and kept it with a negative outlook, indicating it could lower it to junk, citing low oil prices.

In December, Moody’s and S&P released reports showing that the number of companies in the low end of junk territory and with negative outlook rose to the highest level in five years. Both ratings firms said companies in the energy industry and those with exposure to it are most at risk of falling into distress.

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