Most U.S. natural gas-heavy producers’ ratings can withstand a multi-year period of subdued natural gas and oil prices that are below our ratings case assumptions, Fitch Ratings says. Cost structure, hedging intensity and funds availability under long-term credit facilities serving, are key determinants of ratings resiliency for individual issuers, helping bridge negative FCF gaps in our stress analysis.
Although we expect U.S. natural gas prices to increase later in 2023, we recently published a stress test for nine Fitch-rated U.S. energy producers with more than 35% natural gas share in total expected 2023 production volumes and tested them at average Henry Hub spot prices of $2.25/mcf in 2023-2025, as well as $65.00/bbl of WTI oil in 2023 and $60.00/bbl in 2024-2025. These assumptions are more conservative than the base case, but higher than the stress case in Fitch’s recently updated price deck.
Companies with credit profiles that have below-average sensitivity to falling natural gas prices include Coterra Energy, Gulfport Energy and Ascent Resources. All three companies generally have operating netbacks above peers, while Ascent and Gulfport have favorable hedges as well.
Comstock Resources maintains a strong profile under our rating case price deck but is most vulnerable to weak natural gas prices. Comstock’s leverage increases the most, to 4.1x, due to low hedging and consistent negative FCF. All other issuers in our analysis sustained leverage below 3.0x through the stress case forecast, which is within their existing ratings sensitivities. Fitch’s leverage-based rating sensitivities for oil and gas companies are focused on midcycle pricing and performance.
Our stress test shows three companies with negative FCF in each year: Antero Resources, Chesapeake Energy and Comstock. Each has sufficient liquidity to fund these shortfalls; however, Comstock would likely need relief from a 3.5x leverage covenant to maintain access to its revolver. Antero, Chesapeake, EQT Corporation and Southwestern Energy Company may not have excessively high leverage, but they could exceed their downgrade sensitivities under our stress test. Antero’s forecast is highly sensitive to the level of natural gas liquids prices. CNX Resources also approaches its downgrade leverage sensitivity while generating consistent positive FCF.
Hedges would support 2023-2025 profitability in a stress case, similar to the boost to EBITDA they provided for many natural gas producers early in the pandemic in 2020. CNX, EQT and Ascent have the highest percentage of hedged gas production in 2023, but hedged prices can vary depending on when the hedge agreement was struck and whether swaps or options were used. CNX and Ascent hedged the highest average share of volumes in 2023-2025 cumulatively, while Antero, Coterra and Comstock have the lightest hedging programs.
Interest coverage is also more robust after the recent period of low interest rates and tighter spreads. We expect interest coverage to be sufficient during upcoming periods of higher interest rates.
We expect U.S. natural gas prices to increase later in 2023. Factors that should eventually push natural gas prices up include the dearth of potential new wells generating sufficient economic return at around $2.00/mcf, which has resulted in wavering drilling activity; increased LNG feed gas deliveries following the restart of the Freeport LNG plant; and growing domestic natural gas consumption due to coal-to-gas switching. This assumes no significant negative weather-related events for the remainder of 2023.
Currently, our ratings cases assume Henry Hub prices of $3.00/mcf in 2023, $3.50/mcf in 2024 and $3.00/mcf in 2025, with a midcycle price of $2.75/mcf. Our WTI pricing is $70/bbl in 2024, $65/bbl in 2025, $60/bbl in 2026 and $57/bbl at midcycle.
Source: Fitch Ratings