A warning sign is pictured near wellheads that inject steam into the ground and pump oil out at the Cenovus Energy Christina Lake Steam-Assisted Gravity Drainage (SAGD) project 120 km south of Fort McMurray, Alta.Todd Korol/Reuters
Moody's Investors Service's downgrade of debt held by Cenovus Energy Inc. and Encana Corp. to junk status shows that financial strains from oil's collapse are spreading to the industry's biggest players.
Moody's lowered the ratings of senior unsecured notes for both companies three notches to Ba2 from Baa2, citing the impact of skidding oil prices on cash flow. The new level is two steps below investment grade.
In a separate statement, the credit-rating agency maintained Husky Energy Inc.'s investment-grade Baa2 rating and said its outlook is "stable."
The moves come as market jitters over a global supply glut overshadowed a plan by the world's top producers to freeze output near peak levels, pushing benchmark West Texas intermediate (WTI) oil back under $30 (U.S.) a barrel. The March contract, which expires next week, fell $1.13 to $29.64 a barrel on Friday.
The 20-month price rout has crimped industry returns and forced producers to make deeper cuts to spending and employment levels after a year of aggressive pullbacks.
It has also stoked growing concerns about rising industry debt levels, raising the prospect of defaults among smaller and less well-capitalized firms that borrowed heavily when oil fetched closer to $100.
Already, scores of small and mid-sized Canadian producers have been placed into receivership, and several others have sought creditor protection or concessions from lenders.
Calgary-based oil producer Enerplus Corp. on Friday said it lost $625-million (Canadian) in the fourth quarter and that it may seek relief on conditions tied to its debt should current oil prices persist. It ended 2015 carrying $1.2-billion of net debt.
Meanwhile, larger companies have seen yields on various debt obligations climb amid analyst expectations that oil prices could remain at depressed levels for much longer than initially expected.
Recent yields on short- and long-term Encana bonds have jumped to between 10 per cent and nearly 16 per cent, while yields on some Cenovus bonds have shot up to 11 per cent, according to Bloomberg. Encana shares plunged 11 per cent on Friday in Toronto.
A downgrade was expected for Cenovus, although the magnitude was in question, FirstEnergy Capital Corp. analyst Mike Dunn said. Still, he said the company has no debt maturities before 2019 and about $8-billion in cash and undrawn credit facilities at hand, giving it room to breathe.
"So it's not expected to impact their financials or flexibility in any material way in the near term," Mr. Dunn said of the downgrade. Nonetheless, the company will have to post letters of credit to backstop some of its oil-shipping commitments, he said.
Moody's last year put Cenovus and several other Canadian energy producers under review for a possible downgrade as industry conditions deteriorated.
In January, the agency cut its oil price forecast for a second time, lowering its outlook for WTI oil and global benchmark Brent crude this year by $7 (U.S.) and $10, respectively, to $33 a barrel.
Earlier this month, it slashed its senior unsecured debt rating on oil sands giant Suncor Energy Inc. to Baa1 from A3, although it maintained a "stable" outlook on the company. The level is still considered investment grade. Moody's is also reviewing Canadian Natural Resources Ltd.
On Thursday, it said Cenovus faces a material decline in its cash flow as its cost of pumping crude outpaces realized prices, rendering its production uneconomic.
To cope, Cenovus last week chopped its quarterly dividend by nearly 70 per cent and lowered its 2016 budget by about 16 per cent to between $1.2-billion (Canadian) and $1.3-billion. The company reported a loss for the fourth quarter of $641-million and signalled that it plans to cut more jobs this year after reducing staff levels by 24 per cent in 2015.
Moody's said Encana also faces a worsening ratio of debt-to-cash flow, a key measure of creditworthiness, for this year and in 2017.
Encana, which reports fourth-quarter results on Feb. 24, declined comment. Cenovus did not respond to a request for comment. The rating agency said the outlook for both producers is "stable."