Cenovus, Encana Cut to Junk by Moody's as Oil Rout Weighs

Cenovus Energy Inc. and Encana Corp. had their debt ratings lowered to junk by Moody’s Investors Service as a prolonged crude-price rout saps cash flows.

Moody’s cut the ratings of senior unsecured notes for both Canadian producers three steps to Ba2, or two levels below investment grade, from Baa2, according to separate statements Thursday. It also reaffirmed the Baa2 rating of Husky Energy Inc., keeping the Canadian producer’s debt investment grade.

Encana’s bonds due in 2021 fell 3.5 cents to 62.75 cents on the dollar, yielding 13 percent, while Cenovus’s 2019 notes lost 5.5 cents to 84 cents, yielding 11 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. U.S. crude futures dropped 4 percent to $29.54 a barrel at 11:33 a.m. in New York. Standard & Poor’s reaffirmed Encana’s investment grade rating earlier this month, and the agency also rates Cenovus investment grade.

“Moody’s has taken a drastically different view than S&P, which has Cenovus at BBB stable and Encana at BBB negative,” Matthew Kolodzie, a credit analyst at RBC Dominion Securities in Toronto, wrote Friday in an e-mailed note. He called the moves by Moody’s “negative” and characterized the downgrade for Cenovus, which has sold assets and lowered its dividend twice in a year, as somewhat surprising. “S&P has given a lot of credit to management teams that have taken measures to protect their credit profile and boost liquidity. Clearly Moody’s has not.”

The ratings moves come as analysts and energy companies brace for the potential of lower prices for longer in a downturn that has already extended about 20 months. Moody’s reduced its outlook for oil in January for the second time in just over a month, citing a persistent global glut and weaker demand in China. U.S. crude is down more than 70 percent from the high in mid-2014. 

The actions Thursday resolve reviews of the companies by Moody’s started in December. While ratings cuts can be seen as lagging indicators that follow bond-market pricing, there can be implications for borrowing costs. Many funds can’t hold high-yield notes, so a cut from investment grade to junk could trigger a wave of selling. Moody’s has yet to resolve its review of Canadian Natural Resources Ltd., the nation’s largest heavy oil producer, also started in December.