Moody's Reviews 36 E&P Companies for Possible Ratings Downgrade

Moody's Investors Service (Moody's) has this week put the ratings of 29 U.S. exploration and production (E&P) and 7 Canadian E&P companies and their rated subsidiaries under review for downgrade. Among those companies up for review is Noble Energy the leading partner of the natural gas monopoly in the Israeli market and the leading partner in Cyprus's Aphrodite gas field.

Noble is supposed to lead the development of Israel's Leviathan gas field and the expansion of the Tamar gas field when natural gas regulatory framework in Israel is approved. Last month Noble sold 50% of its stake in Aphrodite to BG and both companies are expected to lead the partnership with Noble retaining its operatorship. However the latest Moody's rating review will make it harder for Noble Energy to arrange financing for the development of its East-Med assets.

In a press release released on December 15, Moody's said that it "reduced its oil and gas price assumptions… in light of continuing oversupply in both global oil markets and United States natural gas market….  Although most of the companies being put on review have not had a negative rating action during the current slide of oil and gas prices, today's review for downgrade reflects much weaker industry fundamentals resulting in downward rating pressure."

Peter Speed, Moody's Senior Vice President said: "Industry conditions have weakened further with oil and natural gas prices at multi-year lows. E&P companies will be stressed for a longer period with much lower cash flows, difficulty selling assets and limited capital markets access."

Moody's said it expects weaker industry conditions through at least 2017, as lower prices lead to weaker cash flows, a challenging asset sales environment, and restricted access to capital markets. According to the ratings agency, "low oil and natural gas prices will reduce companies' cash flows and further weaken their credit metrics. Asset sales are much more difficult to transact in this environment and the values of these assets are much lower. Capital markets access, both debt and equity, is limited for energy companies, heightening refinancing risk, particularly for speculative-grade rated companies."

Based on the severity and potential duration of the industry challenges, Moody's said it expects that many companies will be downgraded a notch and some companies could be downgraded more than one notch.

The decrease in value of Noble's East-Med assets was clearly evident when it sold last months Tanin and Karish gas fields offshore Israel to its partner, Delek Group for $73 million, valuing the two fields at about $145 million, about 15% of their valuation last year. Additionally, half of its stake in Aphrodite gas field was sold at a discount of 90% to its previous valuation.

Noble Energy is expected to report huge impairments, in the region of a few billion dollars, in its fourth-quarter report, due to low energy prices that are expected to last for a long time.

Ya'acov Zalel