On Jan. 25, 2021, S&P Global Ratings released its updated industry risk assessments titled "Industry Risk Assessments Update: January 2021" based on the criteria in "Methodology: Industry Risk," published Nov. 19, 2013. As part of this update, we revised the risk assessment for the Oil & Gas Integrated, Exploration & Production (E&P) industry to Moderately High Risk (4) from Intermediate Risk (3), and our oil and gas team reviewed all global rated E&P and integrated issuers. We identified some investment-grade companies that we will place on CreditWatch with negative implications, as well as some whose ratings we will affirm but whose outlooks we will revise to negative from stable. A list of these companies is forthcoming. Shortly thereafter, we will publish individual Research Updates on companies whose business risk profile scores have changed due to the updated industry risk assessment, but whose issuer and issue ratings have been affirmed due to company-specific mitigating risk factors.
In conducting our reviews, we did not focus on credits in the 'B' and below rating categories as their near-term risks contribute more to the overall rating than their exposure to industry risk factors. The change in the industry risk assessment only had a direct impact on issuers with investment-grade ratings due to the longer term outlook of their ratings and their exposure to the identified aforementioned risk factors.
The revision to the industry risk assessment reflects our concerns about the trajectory of oil and gas supply/demand and the impact on producers of fossil fuels, given the increasing adoption and transition of renewable energy alternatives to address climate change. While we believe oil and gas will have a place in the global energy lexicon, market share encroachment of renewable energy over time will have broad implications for hydrocarbon demand, prices, and producers of both fossil fuels. Due to the social and economic risks posed from global warming, sovereign and local governments globally have been enacting stricter policies and regulations while providing industry subsidies aimed at reducing greenhouse gas (GHG) and carbon dioxide (CO2) emissions from the burning of fossil fuels. 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 amongst global investors and financial institutions. As a result, we believe the risk of disinvestment and capital market access may become more challenging and costly for hydrocarbon producers. Moreover, the average returns for the industry have been declining during the last decade (measured by EBIT divided by capital). This lower observed profitability increases the risks of cyclicality and capital intensity inherent to the oil and gas industry. We also believe hydrocarbon prices will remain under pressure over the coming years and will continue to exhibit volatility.
Indeed, recognizing the threat posed by climate change and renewable energy, several large integrated companies based in Europe have made strategic decisions to alter their business models to become more of an energy company rather than just an oil and gas company. However, at this juncture we don't see these strategies as providing material credit differentiation. In our opinion, stricter regulations, substitution, and secular shifts in industry supply/demand fundamentals will contribute to a more difficult operating environment for fossil fuel producers and will likely augment the risk of stranded assets and significant asset write-downs.
Specifically, we capture these risks in our methodology through a revision in our competitive risk and growth assessment (CRGA) for the industry to moderately high risk (4) from intermediate risk (3). We adjusted the following subfactors to revise the CRGA:
Table 1
| Risk Assessments In The Industry | |||||||
|---|---|---|---|---|---|---|---|
| Barriers to entry | --Profit margin trends-- | --Risk of secular change and substitution-- | --Risk in growth trends-- | ||||
| Existing | Existing | New | Existing | New | Existing | New | |
| Oil and gas integrated, E&P | Medium risk | Medium risk | High risk | Low risk | Medium risk | Medium risk | High risk |
About Industry Risk Assessments
The risks entities face because of the industries in which they operate are critical factors in our analysis of their business risk profiles and our assignment of issuer credit ratings (see "Methodology: Industry Risk," published Nov. 19, 2013). The methodology distills this sectorial analysis into a single global industry risk assessment that reflects the risk and return potential for a company in the markets in which it participates. We have industry risk assessments on 38 nonfinancial corporate industries, all based on the criteria. These assessments classify industries on a scale from "very low risk" to "very high risk." Our industry assessments are an important component of our corporate criteria (see "Corporate Methodology," published Nov. 19, 2013). The criteria organize the analytical process according to a common framework and articulate the steps in developing the stand-alone credit profile and issuer credit rating for a corporate entity.
The industry risk criteria are intended to help market participants better understand our approach to evaluating the risks that nonfinancial corporate entities and U.S. public finance and international public finance enterprises face in their respective industries. The criteria are also intended to enhance the comparability and transparency of ratings across sectors by comparing and scoring interindustry risk.
The industry risk assessment combines an industry's cyclicality assessment using the stress scenarios in "S&P Global Ratings Definitions," published Jan. 5, 2021, and our assessment of a sector's overall prospective competitive risk and growth environment. We combine these assessments to determine the global industry risk assessment.
S&P Global Ratings will be hosting a Webinar to discuss these actions. Please see the link below for registration details. https://event.on24.com/wcc/r/2967390/5CB2A5B4F41495257E6F5AC8987604B6
Related Research
- Industry Risk Assessments Update: January 2021, Jan. 25, 2021
- Industry Top Trends: Oil & Gas, Dec. 10, 2020
- Questions That Matter: Oil and Gas | Can Energy Companies Prevail? Dec. 3, 2020
- The Energy Transition: COVID-19 And Peak Oil Demand, Sept. 24, 2020
- The Energy Transition: COVID-19 Undermines The Role Of Gas As A Bridge Fuel, Sept. 24, 2020
- S&P Global Ratings Revises Oil And Natural Gas Price Assumptions, Sept. 16, 2020
- Write-Downs, While Eye-Catching, Are Not The Largest Issue Facing Oil And Gas Supermajors, Aug. 3, 2020
This report does not constitute a rating action.
| Primary Credit Analyst: | Thomas A Watters, New York + 1 (212) 438 7818; thomas.watters@spglobal.com |
| Secondary Contact: | Simon Redmond, London + 44 20 7176 3683; simon.redmond@spglobal.com |
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