We all know oil prices have been on a roller coaster. Just this week, oil hit a new post-financial crisis low at $42.25 on August 13, 2015, the lowest since March 03, 2009. It is apparent that companies in the energy industry are feeling the pain, but just how much?
In the midst of this oil price volatility, we have found the credit risk of energy related industries to be in great flux. We have tracked the median Probability of Default Market Signals (PD MS), for all 7 industries within the Energy sector, as classified by S&P Capital IQ industry codes. PD MS utilizes equity market information to derive a 1-year forward looking probability of default for public companies.
Through this lens, we observe that the Oil & Gas Drilling industry had the sharpest elevation in credit risk during oil’s rout, rising to almost 18% in December, meaning nearly a one-in-five likelihood of default over the next year. This was up sharply from the 0.38% PD on August 13, 2014. By contrast, Oil & Gas Storage & Transportation rose to 2.32% from 0.20% which is an 11-fold increase, but represents more modest risk on an absolute basis.
Following these spikes in corporate credit risk, PD levels then moderated in May and June while oil rose to about $60 a barrel. But, as oil has started to fall again, most recently to $42.25 on Thursday, credit risk again is rising, most notably in the Oil & Gas Exploration & Production (E&P) industry.
Generally, we have seen that upstream credit risk levels are most strongly correlated with changes in energy prices and this has been the case in these extremely volatile oil price markets. Currently, we see that the median level of risk for Oil & Gas Drilling is more than 13x the risk levels from one year ago. E&P is only up 3x but it started as the second riskiest industry with a median PD of 1.78%, and as previously noted, E&P now has the highest level of median risk at 5.86%. Finally, Oil & Gas Refining & Marketing has had the smallest relative increase at 1.7x over the past year and the lowest absolute risk at 1.61% as prospects for these downstream players are relatively more stable.
This analysis has been conducted utilizing our Credit Analytic Index and Benchmarks. These are aggregates of our Credit Analytic prescored values, covering PD Market Signals, PD Fundamentals and CreditModel. These analytics are calibrated at major statistical levels within a given index, country or industry and provide both context for the relative credit risk of a company and insight into trends of an industry or country. Credit Analytic Index and Benchmarks are now available in the S&P Capital IQ Excel Plugin. Find out more here.