Stressed Out: S&P Goes on Downgrade Binge, Southwestern Energy Now 'Junk'

 | Feb 03, 2016 | 9:24 AM EST
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This article is part of a Real Money series on 20 distressed companies investors should consider adding to their distressed watch list.

The near-term outlook for oil and gas companies is bleak, as the price of oil has stubbornly hovered around $30 a barrel in the new year. Standard & Poor's Ratings Service confirmed the dreary outlook as it lowered its credit ratings on 10 U.S.-based oil and gas companies on Tuesday evening.

Among the companies downgraded was Southwestern Energy (SWN), which is a member of Real Money's "Stressed Out" index. The Texas-based company's rating was lowered to BB+ from BBB-, which places the company into "junk" territory. The company's outlook was also downgraded to Negative from Stable.

"The downgrade reflects our expectation of increased leverage and worsening credit measures following the reduction in our oil and natural gas price deck assumptions, and incorporates our assumption of significantly reduced capital spending and a moderate production decline in 2016," Standard & Poor's said of Southwestern Energy in a statement announcing the broader ratings action.

Of the downgrades, Continental Resources (CLR) and Hunt Oil were the only other companies whose rating action put them below investment grade.

In its statement, Standard & Poor's said that despite 15 months of falling oil prices, the U.S.-based investment-grade companies it rates were "largely immune" to downgrades but the magnitude of recent price reductions affected many companies.

"We expect that many of these companies will continue to lower capital spending and focus on efficiencies and drilling core properties," Standard & Poor's wrote. "However, these actions, for the most part, are insufficient to stem the meaningful deterioration expected in credit measures over the next few years."

Among the other companies affected by the ratings actions was Chevron (CVX), which saw its rating downgraded to AA-, due in part to the company's higher debt load compared to previous cycles and its perceived inability to generate enough cash to lower its debt burden.

Hess (HES), EOG Resources (EOG), Apache (APA), Marathon Oil (MRO), and Murphy Oil (MUR) were also downgraded due to lower oil and gas prices and concerns about their internally generated cash flows being sufficient to fund capital spending, dividends, and debt coverage.

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Southwestern Energy Downgraded to Neutral by J.P. Morgan

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