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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Does This "Panic Index" Show A Major Crisis Coming In Oil And Gas?

Little-reported but extremely critical data point for the oil and gas industry emerged yesterday. With insiders in the debt business saying that risk levels in the sector have risen to unprecedented levels.

That came from major ratings service Moody’s. With the firm saying that one of its proprietary indexes of credit problems in the oil and gas sector has hit the highest mark ever seen. Related: $32 Billion Loss Forces Pemex To Downgrade Offshore Ambitions

That’s the so-called “Oil and Gas Liquidity Stress Index”. A measure of the number of energy companies that are facing looming credit problems because of overextended debt.

Moody’s said that its Stress Index rose to 27.2 percent as of this week. Marking the highest level ever seen in this key indicator.

In fact, that level is now considerably worse than seen during the last recession. When the Stress Index topped out at 24.5 percent. Related: This Might Be A Multi-Billion Opportunity For Oilfield Services

Moody’s said that the big jump in the index comes after a significant number of downgrades to energy company credit during February. With the firm having its biggest month ever for lowered credit scores — with a total of 25 firms seeing downgrades to their debt.

Those downgrades are largely affecting the exploration and production space. With 17 of the affected firms coming from the E&P sector. But Moody’s also said that oilfield services firms have been hit with lowered credit ratings.

Critically, the firm said that 10 E&P companies saw ratings on their corporate liquidity cut to the lowest level possible during February. Suggesting that these companies are facing serious issues when it comes to maintaining operating capital. Related: How To Spot Survivors In North American Oil

And Moody’s didn’t mince words when it came to forecasts for the rest of 2016. With Senior Vice President John Puchalla saying, “The composite LSI has been increasing since November 2014 and has moved above its long-term average. This progression signals that the default rate will continue to rise as the year progresses.”

All of which suggests there’s a lot of pain to come in the oil and gas space. Watch for more defaults and bankruptcies coming in the E&P sector.

Here’s to getting ready

By Dave Forest

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