Energy companies are coming under severe liquidity pressure as a result of continued weakness in commodities prices, suggests a new report from New York-based Moody’s Investors Service Inc.
The credit-rating agency reports that its Liquidity Stress Index (LSI) for the energy sector is now at a record high level (27.2%), surpassing the previous high (24.5%), which was reached during the last recession.
The new high for the energy LSI follows the downgrade of 19 energy companies in February, which was the biggest month ever for liquidity downgrades. In fact, Moody’s notes that 10 exploration and production companies had their liquidity ratings cut to their lowest level during the month.
“The prolonged weakness in energy sector credit conditions is driving the sustained increase in the LSI,” says John Puchalla, senior vice president with Moody’s, in a statement. “Energy liquidity downgrades came as part of our ongoing review of oil and gas companies globally in light of the weaker price environment.”
Moody’s also reports that its composite LSI jumped to 8.9% in February from 7.9% in mid-January and is now at its highest level since November 2009. This signals more corporate defaults, the firm notes.
In addition, Moody’s forecasts that the U.S. speculative-grade default rate will rise to 4.7% in January 2017 from its current level of 3.1%.