Downturn will mark unprecedented shift for mining industry: Moody’s

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.

Schlumberger said Thursday low crude prices are adding to a “deepening financial crisis” among its exploration and production customers, who exhausted their budgets early in Q4 and prompted “unscheduled and abrupt activity cancellations”. In addition, the strong U.S. dollar is a further factor contributing to weakening demand and driving prices lower since most metals are traded in dollars, Moody’s said.

“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. Among the oil companies, 69 US exploration and production firms are on review, including shale producers such as Laredo Petroleum (NYSE:LPI), Carrizo Oil & Gas (NASDAQ:CRZO), Sanchez Energy (NYSE:SN) and Diamondback Energy (NASDAQ:FANG).

“Even under a scenario with a modest recovery from current prices, producing companies will experience much lower cash flows”, Moody’s said.

It’s estimating the West Texas Intermediate benchmark crude will be about $33 United States a barrel this year, on average, rising to $38 USA per barrel next year and $43 U.S. barrel per day in 2018 – higher than recent prices but down from 2014 and 2015.

Energy companies’ balance sheets and share prices have been hammered by one of the sector’s worst downturns in decades, leading so far to a relatively limited number of bankruptcies. Moody’s said it sees a substantial risk that prices might recover “much more slowly” over the medium term than many companies expect.

“Moody’s believes that this downturn will mark an unprecedented shift for the mining industry”.

Oil giants Total (NYSE:TOT) and Statoil (NYSE:STO), which were also put on review by Moody’s for downgrade, were up 3.7% and 4%, respectively. “Whereas previous downturns have been cyclical, the effect of slowing growth in China indicates a fundamental change that will heighten credit risk for mining companies”.