Share prices of oil and gas giants Woodside and Santos dip as ratings agency reviews sector

Share prices of ASX oil and gas majors Woodside and Santos dip by 3 to 4 per cent, Wednesday
‘We have placed our ratings on nine companies and their subsidiaries on CreditWatch with negative implications’ S&P Global Ratings
Global transition away from hydrocarbons to renewable energy sources accelerated by COVID-19

Oil and gas giants Woodside (ASX:WPL) and Santos (ASX:STO) slipped by around 3 per cent in Wednesday trading after S&P Global Ratings reviewed the sector.

The credit ratings agency took the step overnight of putting the ratings of 13 oil and gas companies under review, including its BBB+ rating on Woodside Petroleum.

By putting the list of nine oil and gas majors and four of their subsidiaries on CreditWatch Negative, S&P Global Ratings is highlighting a potential change in their credit rating.

A credit rating is used by lenders to determine the credit worthiness of a borrower, in short their ability to repay borrowed funds to a lender such as a bank or financial institution.

The action could lead to Woodside Petroleum’s current credit rating of BBB+ being lowered, and the ratings of other oil and gas majors on the list could also be affected.

The list of oil companies placed on CreditWatch Negative includes, US oil companies Chevron, Conoco Phillips, and Exxon Mobil.

Plus, UK-based Royal Dutch Shell and its North American business unit, plus China Petrochemical and China National Offshore Oil and French company Total.

“We have placed our ratings on nine companies and their subsidiaries on CreditWatch with negative implications, as we review the consequences of higher business risks for these ratings,” said S&P Global Ratings in a report.

Australian oil company Santos was not mentioned in the S&P Global Ratings report, and its credit rating is unchanged.

ASX gas producers have been enjoying windfalls from a winter-led spike in LNG prices for Asian markets including Japan, Korea and China.

CreditWatch review to be completed in February

Company credit ratings are placed on to CreditWatch by S&P Global Ratings either when an event or short-term trend has occurred, or if there has been a material change in performance of a bond issue, or a change in criteria that form the basis of a rating, said S&P Global Ratings in its ratings guidance.

The credit ratings agency plans to resolve its CreditWatch placements in a few weeks’ time, after analysing the implications of the oil companies’ recalibrated business risk profiles.

“In most cases, at this point, we do not anticipate downgrades of more than one notch solely as a result of the industry risk review,” S&P Global Ratings said.

The slippage in Woodside Petroleum’s and Santos’ share prices Wednesday does not appear to be connected to any move in oil and gas prices which were stable overnight.

The West Texas blend of crude oil was trading at $US52.75 per barrel, and natural gas at $US2.65 per MMBTU, on Wednesday.

Oil and gas sector’s risk assessment raised

S&P Global Ratings has also raised its risk assessment for the oil and gas industry as a whole to ‘moderately high risk from intermediate risk’, it said in a report Tuesday.

“The revision to the industry risk assessment reflects our concerns about the trajectory of oil and gas supply and demand and the impact on producers of fossil fuels, given the increasing adoption and transition of renewable energy alternatives to address climate change,” said S&P Global Ratings in a research note.

The ratings agency said it believed oil and gas producers faced increasing risks and spelled out the specific areas of concern, as follows:

“Significant challenges and uncertainties engineered by the energy transition, including market declines due to growth of renewables.”

“Pressures on profitability, specifically return on capital, as a result of high dollar capital investment levels over 2005-2015 and lower average oil and gas prices since 2014.”

“Recent and potential oil and gas price volatility.”

The ratings agency did not mention COVID-19 as a reason for the review into the ratings of the 13 listed oil and gas companies, but it was referred to in its research note.

“The transition and the timing of peak hydrocarbon demand in our view, has and will continue to accelerate due to COVID-19 and the growing adoption of ESG investment mandates among global investors and financial institutions,” the ratings agency said in its note.

“As a result, we believe the risk of disinvestment and capital market access may become more challenging and costly for hydrocarbon producers,” it added.

The oil and gas industry is also facing rising competition from hydrogen as a carbon-neutral fuel source for transport and industry.