Volatile commodity prices are weighing heavily on some US companies even as others enjoy stable industry fundamentals, according to Fitch Ratings. We also believe international growth challenges could create additional pressure.
Among rated US corporates, 26 out of 34 sectors have Stable sector outlooks. Of the six sectors with Negative outlooks, four are in commodities-related areas: oil & gas, oilfield services, midstream services, and mining. These industries also have negative rating outlooks.
Many high-yield companies in the oil and gas sector are in survival mode, suffering from some combination of a higher cost base, declining hedge coverage and lack of financeable assets. The sector’s negative sector outlook reflects the risks of a lower-for-longer price scenario across the space. Lower oil and gas prices and Fitch’s downward revision of our corporate oil & gas price deck earlier this month will likely increase the number of negative ratings actions across the sector.
Exploration and production companies are signaling for a second consecutive year of capex cutbacks, which will add pressure to oilfield service provider metrics. We believe capex cuts will be the deepest for US independents and could be reduced an additional 20%-30% following an average 35% cut in 2015. International oil companies will likely exhibit increased discipline in 2016, with an estimated 10%-15% reduction while the credit profiles of national oil companies are expected to be mixed. Still, diversified services providers are better positioned to weather another year of E&P capex cutbacks due to their geographic diversification, breadth and scope of services, and generally more manageable leverage.
Ratings of most midstream issuers should continue to be stable, but continued low commodity prices, increased counterparty risk, potential volume declines, constricted capital market access and rising leverage could lead to negative rating actions or Outlook changes.
Most mining companies currently have credit profiles that are weak for their assigned ratings. Limited revenue growth is expected in 2016 and we expect companies to continue to focus on cost control and short-term liquidity management.
Weak non-US global economic growth is considered an evolving risk that could erode corporate strength. China growth has slowed, while Brazil and Russia are both experiencing recessions and European growth is underwhelming. Slow global growth is already affecting the credit profiles for many diversified and capital goods issuers that are also suffering from the negative impact of currency movements and cyclical weakness.