Oil is now close to 6 month highs today, with Brent touching $47 (up over 70% from January’s ~$27 lows) and US WTI reaching $45 per barrel. This is even above Moody’s Brent forecasts of $43/BOE for as far out as 2018 ($33 and $38 are forecast for this year and next) which were all revised down to these levels on the 21st January earlier this year. At the time this significant $10 downward revision for current oil expectations came after a number of smaller reductions and was perhaps viewed as a line in the sand which if crossed could signal serious concern, not only for oil companies but, for the global economy. Even this low $33 estimate carried warnings that, “Moody’s would be likely to lower this estimate if such an upward trend were not to materialize over the next several months.” Following this fundamental shift a broad range of oil related credits underwent single and multiple notch downgrades across all rating agencies.
In fact, the day the major downward revision came turned out to be the very first day of the ongoing upward trend (having bottomed out at the lowest level for almost 12 years). Average prices for the first 4 months of 2016 now exceed $37 per barrel; thus they would have to plummet and remain below $30 to fall below existing forecasts, which are averages for the year. If such a divergence remains or even extends (i.e. oil maintaining levels considerably above $33 and no revisions to estimates) it may be prudent to keep in mind that recent downgrades are founded on such estimates. As such there is a possibility that a slight potential upside may be slow to be reflected in the wider market and ratings.
But the current uptrend comes after a difficult quarter and today also saw Standard and Poor's downgrade Exxon Mobil to AA+ from the AAA rating it has held for over 30 years (Moody’s still have the company at Aaa but on negative watch) citing not only lower oil prices but also the company’s preference to repurchase shares whilst doubling debt levels in recent years and their concern over replacing ongoing production as, “the company’s greatest business challenge”.
Contrastingly, Norway’s Statoil (Aa3/A+) - one of our preferred highly rated oil credits - posted quarterly profits beating estimates despite Brent oil prices dipping below $28 during this period. This uncommon upside surprise is the result of their significant cost cutting programme which apparently shaved as much as a quarter of operational and administrative expenses whilst maintaining quarterly production above 2.05m barrels of oil equivalent (BOE). Such operational efficiency is creditable especially from a company that enjoys an unusual level of business resilience, a substantial cash position and is 67% owned by the Norwegian state which has a vested interest in the company as well as an $800bn Sovereign Wealth Fund.
Yet for all these advantages Statoil has traded as much as 250bps over US Treasuries this year offering significant value for such a highly rated and quasi supported credit. Even now at +144bps, the bond maturing in 2043 is 1-2 credit notches cheap and to us seems like a sensible high investment-grade credit to hold, on a risk adjusted hunt for yield.