KBRA Releases an Updated View of Energy Firm Creditworthiness: Fundamentally Weaker or Battle-Tested?

NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) releases a new research report, An
Updated View of Energy Firm Creditworthiness: Fundamentally Weaker or

The collapse in energy prices in 2014 and 2015 derailed firms that had
aggressively leveraged to increase production based on overly optimistic
commodity price assumptions. One rating agency dramatically re-rated the
industry in 2016 based on an expectation that challenging conditions
would persist in the industry, thus triggering a fundamental change in
the industry’s ability to generate cash flow. While the industry
underwent a significant competitive shakeout, KBRA believes fears of the
industry’s demise were overblown.

Rather than adopt a “guilty until proven innocent” approach to
evaluating the impact on the industry, KBRA believes that the episode
revealed that there was—and is—a broad spectrum of firm-specific risk
across the sector. Looking back, a review of fundamental performance
confirms as much.

Included in our report are a number of illustrative case studies that
highlight critical elements in asset quality and risk management that
proved to be instrumental in determining a particular firm’s ability to
withstand commodity price collapse. Management teams that prudently
managed operational and financial risk proved able to power through and
raise capital if necessary. We believe the industry and its investors
have learned from having gone through the period, and that will
positively shape some behavior in the future. Accordingly, KBRA does not
believe that there has been a fundamental change in the industry’s
ability to generate cash flow.

KBRA believes price volatility is here to stay. We believe many firms
will adjust to this new normal by adopting more conservative operating
and financial practices. KBRA will keep management’s strategy and
actions at the core of its analysis—its rationale for choosing its
capital structure, and how it squares financial risk with the expected
cash flows from its assets. We will look to understand management’s
philosophy and practices regarding liquidity, viewing positively
management teams that focus on free cash flow. Ultimately, each firm
will find its own unique way to reconcile stakeholder interests while
managing risk.


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About KBRA and KBRA Europe

KBRA is a full service credit rating agency registered with the U.S.
Securities and Exchange Commission as an NRSRO. In addition, KBRA is
designated as a designated rating organization by the Ontario Securities
Commission for issuers of asset-backed securities to file a short form
prospectus or shelf prospectus, is recognized by the National
Association of Insurance Commissioners as a Credit Rating Provider, and
is a certified Credit Rating Agency (CRA) by the European Securities and
Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is
registered with ESMA as a CRA.


Kroll Bond Rating Agency

Corinne Hill, CFA, Senior Director
Gracely, Analyst
(646) 731-3329
Hesser, Senior Managing Director
(646) 731-2305


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