Rating agency explains financial landscape for energy firms

By Luke Geiver | December 03, 2019

Full-service credit rating agency Kroll Bond Rating Agency, believes that differentiation in the energy industry in terms of operational and financial risk management has increased. KBRA recently released a new thought-piece report details what it sees happening in the near-term shale energy industry.

“Some companies are becoming more disciplined in response to the industry’s challenging headwinds, while other energy companies have remained static. Mergers and acquisitions activity in the sector is providing a useful litmus test into this dynamic,” KBRA said.

Key takeaways from the report are as follows:

-KBRA expects that the M&A activity will continue, reflecting an increased level of distressed high-yield energy companies, an upcoming wall of bond maturities (discussed in KBRA’s previous piece, (Navigating Energy Headwinds), and reduced capital directed toward the industry.

-An increasing number of energy companies engage in mergers in pursuit of cost synergies, allowing them to manage volatile energy prices more effectively.

-KBRA expects that companies in stronger financial positions may capitalize on weaker peers that have not implemented financial discipline, acquiring assets at attractive prices.

-Equity has been used increasingly to fund M&A transactions; however, equity share prices have typically declined following M&A announcement, as shareholders question their value creation.

-The fixed income market’s reaction to these transactions has been largely positive, especially compared to the trajectory of the energy high-yield bond market. KBRA views most of the mergers discussed in this report as credit positive.