S&P Global Ratings cut the credit ratings of six pure-play shale gas producers late Feb. 3, based on worries that they will not be able to refinance billions of dollars in bonds because of expected low gas prices and chronic overspending to drill for gas the market does not want.

Ratings also moved the credit outlook for eight of nine pure-play gas producers under its review to negative, with only tiny Marcellus and Utica shale producer Montage Resources Corp. getting an affirmation of its B- rating with a stable outlook.

The downgrades and deteriorating outlook came in an environment where natural gas prices are forecast to stay below $3/MMBtu for the next two years, with break-even prices for producers estimated to be $1.80/MMBtu in the Marcellus Shale and $1.94/MMBtu in the Utica Shale, according to S&P Global Platts Analytics. The less-than-$1/MMBtu margin will leave little wiggle room for bad wells, warm winter weather and payments to lenders, much less cash back to shareholders.

"We are particularly concerned about some of the issuers' ability to access the capital markets given investor aversion to the space and their current bond trading yields," Ratings said in the note accompanying the ratings cuts.

"The market is trying to force a pullback in activity," Tudor Pickering Holt & Co. oil and gas analyst Sameer Panjwani said.

Panjwani noted that while producers have hedges to protect production this year, those hedges are not in place for 2021. The analyst thinks that producers need to cut spending far more than their drilling plans in order to balance both their books and an oversupplied gas market.

The ratings cut will have an immediate impact on America's largest natural gas producer, EQT Corp. According to the prospectus for a $1.75 billion bond offering that EQT closed Jan. 21, the S&P Global Ratings downgrade, combined with an earlier downgrade by Moody's Investors Service, could add up to 0.50% to EQT's 6.125% and 7% coupon rates for the new bonds due in 2025 and 2030.

Further, the credit downgrade will affect how much cash collateral EQT needs to post for its midstream service and pipeline obligations. "Although we believe we have sufficient letter of credit capacity or other liquidity options to deal with such a scenario, we cannot predict the impact these posting requirements may have on our business," EQT said in the bond prospectus.

EQT did not reply to an email asking for details on the impact of the downgrade.

Not affected by the latest rating action were shale oil and gas producer Chesapeake Energy Corp. and Marcellus producer Cabot Oil & Gas Corp. Cabot's debt is privately placed and not rated by any agency, while S&P Global Ratings upgraded Chesapeake to CCC on Jan. 17 after a selective default following a series of bond refinancings.

This S&P Global Market Intelligence news article contains information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.

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