Meg Energy Corp. and Baytex Energy Corp. are among five Canadian oil and natural gas producers that had their debt ratings cut further into junk levels by Moody's Investors Service as the worst crude-market slump in decades erodes cash flows.
Moody's reduced Meg's corporate family rating three notches to Caa2, or eight levels below investment grade, while lowering Baytex by four to Caa1. Northern Blizzard Resources Inc., Bellatrix Exploration Ltd. and Paramount Resources Ltd. also had ratings lowered, Moody's said in separate statements. More downgrades may follow as the rating agency assigned them negative outlooks. The rating reviews begun Jan. 21 when Moody's reduced its forecast for oil prices for the second time in a month.
Investors are demanding higher yields on bonds of heavily indebted, small explorers as they favour companies that can better weather the price rout. Oil has fallen more than 70 per cent since June 2014 as Saudi Arabia leads the Organization of Petroleum Exporting Countries into a price war to gain market share from higher-cost producers in North America and elsewhere.
Speculation that the downturn will be prolonged has increased as volatility in Chinese markets bolstered concern that demand will drop in the world's second-biggest crude– consuming country. Oil-market fundamentals have become more dire for companies even since December, Moody's analysts led by Steven Wood wrote in a report last week. Global oversupply persists with high inventory levels worldwide and additional supplies coming online from Iran are offsetting the reduction in U.S. shale drilling, they said.
Baytex is expected to breach financial covenants in 2016 and will need relief from its banks, Moody's said Wednesday. Meg's capital structure is "untenable" and will remain that way for the next few years, according to Moody's. Moody's also on Wednesday reaffirmed the B1 rating of Seven Generations Energy Ltd., a gas producer, which was also put on review earlier this month. The outlook for Seven Generations is positive, Moody's said.
There still may be more cuts to come. The actions Wednesday don't resolve other reviews started by Moody's in December of investment-grade Canadian producers including Encana Corp., Canadian Natural Resources Ltd., Cenovus Energy Inc. and Husky Energy Inc.