The liquidity positions of EMEA-focused high-yield oil exploration and production companies have moderately improved thanks to modest year-on-year improvements in oil prices and a reduction in costs, Fitch Ratings says. But some companies are still struggling to balance their cash flows, particularly those with higher production costs, significant committed capex requirements or operations in high-risk countries.
The improvements could also be fragile if recent oil price weakness accelerates and proves to be sustained. Liquidity is a key rating factor for smaller exploration and production companies, as was shown by the collapse of Afren in 2015 and Seven Energy’s ongoing fight for survival. This vulnerability stems from factors including often higher leverage, negative free cash flow and more limited access to banks and capital markets. One of their main sources of funding is reserve-based lending (RBL); many companies’ RBL capacities were cut in 2016. We expect this trend to start to reverse in 2017, with RBL debt capacities either being affirmed or moderately increased in the ongoing spring reviews, thanks to modest year-on-year oil price improvements and gradually increasing lending appetite in the sector. We normally look at liquidity by comparing sources and uses of cash over the next two years.
On this basis US-listed Kosmos Energy (B/Stable), which operates mainly in Ghana, has the strongest position, with over USD1 billion of liquidity in 2017. At the other end of the spectrum, Kuwait Energy (B-/Rating Watch Negative) has a liquidity deficit of USD25 million in 2017, while Nigeria’s Seven Energy (C) is in the worst position.
Liquidity positions are generally improving, but they could deteriorate quickly if there were a further sustained fall in oil prices. Our base case is for Brent to average USD52.5/bbl in 2017 and USD55/bbl in 2018, but higher-than-expected growth in US shale production, or the inability of OPEC and some non-OPEC countries to extend production cuts agreed in the second half of last year, could push prices lower.
Source: Fitch