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Sector IQ: Energy - Production Up, Prices Down, Oil Prices Correlated With Credit Risk

S&P Capital IQ’s most recent publication of Sector IQ: Energy explored many topics around the central theme of increased hydrocarbon production and falling prices. Key themes include topics around midstream deal volume, offshore day rates, changes to MLP structures, falling prices, exports and more.  

One fundamental linkage that the report explores is the correlation between oil prices (as measured by Brent and WTI) and credit levels of companies in the energy sector.  Given the recent collapse of oil prices, establishing these relationships is especially critical.  What does it mean for risk levels when oil prices drop?

Our study into this relationship reveals that changes oil prices are negatively correlated with changes in probability of default levels for companies in the energy sector (shown in the chart below).  This means that when oil prices down – as they have been – risk levels go up!  The study also reveals that this relationship differs depending on where you are in the energy sector in terms of upstream, midstream or downstream.  The strongest (negative) correlations were with upstream categories of exploration and production (-30%) and drilling.

The weakest relationships were in the refining and marketing category.  This is not surprising as frequently downstream players are not able to adjust prices at the pump in the same amount or speed as they occur upstream.

More from Sector IQ: Energy:

The Energy industry is rapidly evolving. With shale boosting oil, gas, and NGL production in the U.S., the country could potentially become energy independent and a net crude exporter. We have also seen Brent prices fall the third largest dollar amount recorded in a very short period. What will this mean for asset prices, credit risk levels, and the economy more broadly? As our cover indicates, we may be experiencing an Energy Renaissance…

In this second edition of Sector IQ: Energy, we explore why these events are unfolding and what the global implications will be. By leveraging content, analytics, and industry specialists from across McGraw Hill Financial, including S&P Capital IQ, Standard & Poor’s Ratings Services, S&P Dow Jones Indices, Platts and Bentek Energy, we provide a unique perspective and essential intelligence on the energy sector.

 

Read the rest of the Sector IQ: Energy, Issue 2 here. 

Want to receive this report direct to your inbox every quarter? Visit www.spcapitaliq.com/sectoriq to subscribe.

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