Steep oil price discounts place oilpatch credit ratings in danger, warns DBRS

CALGARY – Credit rating agency DBRS Ltd. is warning that some of the big Canadian oil and gas companies it covers could face downgrades in their credit scores if current steep price discounts for their products continue.

Such rating cuts could affect the companies’ ability to access credit to fund growth and potentially increase what they pay to service their debt.

Energy senior vice-president Victor Vallance of DBRS says the wide difference between oil prices in Western Canada and on global markets is unprecedented and makes predicting energy company profitability and cash flow extremely difficult.

He says the recent drop in London-traded Brent and New York-traded West Texas Intermediate oil prices make the problem even more acute for Calgary-based oil and gas producers, estimating that their credit ratings will deteriorate if discounts don’t improve significantly in the next six months or so.

Like most analysts, he blames the discounts on a lack of pipeline capacity to take oil to market, adding that the constraints which initially mainly affected heavy crude grades are now also affecting upgraded synthetic crude from the oilsands and light oil.

He says the difference between WTI and Western Canadian Select bitumen-blend crude has narrowed recently because more WCS oil is being shipped via rail and companies are voluntarily curtailing output to avoid low prices.

“Currently the differential is very high on heavy, it’s very high on light, it’s very high on synthetic, so that’s putting a lot of pressure on cash flows and, obviously, credit metrics as a result,” Vallance said.

“It’s very unusual. I’ve never seen … this disconnect between Canada and the rest of the world, unfortunately, because of the increase in supply and not sufficient enough expansion of takeaway capacity.”