I wrote in late January about 175 mining and energy firms being placed on watch for credit downgrades — potentially signalling a wave of financial problems coming across the resources sector.
And this week the ratings shoe dropped on two big names — one in mining, and one in oil and gas.
The first casualty was the world’s largest copper miner, Chile’s state firm Codelco. Related: Computerized Trading Creating Oil Price Volatility
S&P this week said it is lowering Codelco’s rating to A+, down a notch from AA-. Which knocks the major miner out of the classification of “high grade” debt, into the “upper medium grade” segment.
Justifying the downgrade, S&P cited lower copper prices — and also said that declining ore grades at Codelco’s mines are a risk to cash flows going forward.
As a final note, the ratings agency said that Codelco’s ambitious capital spending plans over the next few years are likely to drive the miner into deficit. With S&P saying it expects a cash flow shortfall of $1 billion at the firm for 2016, growing to a deficit of $2 billion in 2017 and $3 billion in 2018 — even assuming that the Chilean government injects $2.4 billion in new funds for the firm. Related: Iran Signs Oil Deal With Total, Deal Done In Euros
S&P did however maintain Codelco’s outlook at stable. Which was more than ratings agencies could say for a big player in the offshore oil and gas space — Fieldwood Energy, a major Gulf of Mexico operator backed by private equity giants Riverstone Holdings.
On Monday, Moody’s took the axe to Fieldwood’s credit ratings. Lowering the company’s first-lien debt to Caa1 (substantial risks) from a former Ba2 (non-investment grade speculative) rating — and dropping Fieldwood’s second-lien debt all the way to Ca (extremely speculative/default imminent).
Moody’s cited Fieldwood’s weak capital structure and liquidity as reasons for the downgrade — as well as expectations that the company will have trouble covering its debt as commodity hedges come off through 2017. Causing the agency to adopt a “negative” outlook for Fieldwood. Related: In Spite Of Oil Price Slump, Speculators Drive Bets To Record Levels
“Based on our expectations for low oil and natural gas prices over the next several years,” said analysts, “Moody’s believes it is likely that Fieldwood’s debt will need to be restructured.”
That would be a major blow for a firm that’s attracted billions in capital from some of the world’s biggest energy private equity groups. Showing that the current downturn has caught even industry insiders off guard in a major way. Watch for more, similar stories unfolding soon.
Here’s to seeing it coming
By Dave Forest
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