Where is the Oil and Gas Industry Headed? A look at credit risks in 2024

Where is the Oil and Gas Industry Headed? A look at credit risks in 2024.

According to S&P Global Ratings Published Industry Outlook in 2024^[1], the overall positive credit rating trends seen in previous years for oil and gas continued in 2023. Healthy oil and Title Transfer Facility (TTF) natural gas prices, robust refining margins, and financial discipline that limited production growth enabled companies to garner strong netbacks and cash flow. Producers remain focused on a financial discipline that targets limiting outspend and capital expenditure levels. The high levels of M&A activity in 2023, particularly in North America, were largely credit positive as most acquirors used equity as a currency. S&P Global Ratings expects positive momentum to slow in 2024 as issuers allocate more cash flow to equity-friendly initiatives.

Risks to the Public Credits Outlook

While the overall situation looks favorable, there are four major concerns that could impact the credit outlook in 2024:

1. Insufficient supply restraint from OPEC+ or expectations of weaker demand growth. Oil market balances hinge on OPEC+ continuing to hold back supply. Demand growth is likely to moderate but could soften further with China and India as key drivers.
2. Government interventions. 2022-2023 saw a remarkable step up in government involvement in the energy sector. S&P Global Ratings believes there are ongoing and increasing risks of impacts on industry players from regulation, taxation, and policy implementation.
3. A reversal of companies’ trend to strengthen financial discipline and resilience. Debt reduction and limiting capital spending and shareholder distributions to internally generated cash flows have been key drivers of recent rating upgrades. Companies could start unwinding these credit benefits if organic or inorganic investments step up materially. This would be exacerbated if operating cash flows fell at the same time.
4. Intensifying environmental risks could potentially affect credit ratings. Oil and gas activities are typically the most exposed to uncertainties of the energy transition.

Considerations for Risk Managers to Sustainable Growth and Financial Resilience:

These major concerns are problematic for risk managers for four main reasons:

1. High number of counterparties to assess. Large oil and gas companies conduct business with a large volume of counterparties across firm types, sizes, and geographies. Monitoring the financial stability of so many firms during times of uncertainty can be challenging, especially for small- and medium-sized enterprises (SMEs) that often lack the necessary financial data for analysis.
2. Country/regional differences add to complexity of the assessment. Credit risk will vary region to region requiring country-specific assessments to understand and account for differences. Regional nuances have to be taken into account for a holistic view of the aggregated underlying risk exposures, in order to support informed business decision making.
3. New areas of risk. Climate risk is one of many new areas that are an important consideration for energy companies and their counterparties. The number of countries announcing pledges to achieve net zero emissions over the coming decades continues to grow, implying a huge decline in the use of oil and gas in the years to come. 
4. Low default yet high impact exposures. New or expansion oil and gas construction projects are capital intensive and inherently complex given the number of financial counterparties typically involved and the need for qualitative analysis that is unique to each site. Risk managers need to assess and monitor the underlying risks associated with these projects that lack the default data necessary for statistical models that can be robustly calibrated and validated.

Given these challenges, risk managers at oil and gas companies need to find the right tools for managing and monitoring counterparty risk, work efficiently through automation and the use of standardized templates and metrics, capture risks for high-impact exposures, and understand the impact of climate-related transition risks on the company and its counterparties.

A Range of Solutions 

S&P Global Market Intelligence has a wide range of solutions to help deal with these issues, including: 

RiskGauge^TM that enables users to assess the credit risk of over 50 million public and private companies with business credit risk reports that leverage cutting-edge analytical models and credit scores,¹ robust private company data, company firmographics, relative performance benchmarks and rich, insightful commentary. Climate RiskGauge that extends this to enable users to evaluate the impact of climate-related scenarios on their portfolios to better understand the possible risks and opportunities that may arise on the journey to a low-carbon economy.

The Corporate Credit Assessment Scorecards that are easy-to-use tools that draw on a mixture of quantitative and qualitative questions in a check-box style to identify key risks in a consistent and repeatable way. They are fully transparent providing the underlying logic and generating letter grade credit scores that are globally applicable, broadly aligned with S&P Global Ratings’ criteria and supported by historical default data back to 1981. The Scorecards are especially useful for low-default portfolios that, by definition, lack the internal default data necessary for the construction of statistical models.

S&P Global Market Intelligence’s Project Finance Suite that provides a general framework for the analysis of project finance transactions, across a range of sectors and geographies, with the use of well-established project finance debt rating criteria developed by S&P Ratings and 20 plus years of global market experience. The Project Finance Credit Assessment Scorecards that capture atypical structures, can assess 100 plus different project types, and run probability of default (PD) assessments from preliminary stage through the whole life cycle of a project.