Fitch Ratings issued a note Friday maintaining the North American Energy (Oil & Gas) sector neutral. Fitch expects continued conservative capital deployment, moderate volume growth despite significantly above midcycle prices, and strong focus on FCF.
Fitch said that robust FCF has allowed a number of producers to accelerate refinancing, execute debt reduction initiatives and increase shareholder returns.
Highlights
- West Texas Intermediate prices seen moderated through 2022.
- Fitch anticipates a majority of issuers will continue to generate positive FCF given moderate capex (65%-75% reinvestment rate).
- Warn that a higher Oilfield-servicer (OFS) inflation could provide a cash flow headwind.
- Shareholder returns could accelerate if prices remain elevated into 2H22.
Refiners
Refiners have experienced a slower recovery from pandemic-driven troughs versus E&Ps. Several rating outlooks have stabilized but balance sheet improvements have been more measured.
Improving crack spreads, increasing demand in key end markets (e.g. diesel), and lower inventory point to positive momentum within the industry.
Fitch views vulnerability to further coronavirus flare-ups (omicron) and exposure to high environmental compliance costs as sector challenges.
Fitch Ratings
Ratings Breakdown as of October
- Approximately 64% of issuer ratings had a Stable Outlook.
- Nine issuers, mostly upstream issuers, had a Positive Outlook.
- Four issuers Outlook remained Negative, all of which are High Yield Refining issuers.
- One fallen angel has returned to investment grade in 2021 and two currently have Positive Outlooks.
- Fitch executed eight upgrades and 12 Outlook revisions YTD 2021 compared with 20 downgrades in the equivalent period of 2020.
Source: Fitch
From The Traders Community News Desk