In a report released yesterday (Thursday), Standard & Poor's
said it believes the preponderance of Canadian oil and gas
speculative-grade exploration and production (E&P) companies in
the 'CCC' category has caused more investors to focus on potential
recoveries. "Based on our review, we expect very high recovery
prospects on all but one of the secured debt issues from the
Canadian E&P companies we rate, corresponding to a '1' recovery
rating," said S&P's credit analyst Jarrett Bilous in the
report, entitled, 'Canada's Oil And Gas Exploration And Production
Companies Have Strong Recovery Prospects For Secured Debt.'
According to S&P, recovery prospects are among the most
favorable for debt instruments from lower-rated issuers,
particularly those in the 'CCC' category, which is largely a
function of their current debt structures and the value ascribed to
reserves and resources that are not currently generating cash flow.
S&P says although the data available on actual defaults are
limited, it believes that the few Canadian E&P defaults in the
past few years anecdotally support its recovery expectations.
S&P notes it has downgraded several E&Ps in the past
year, generally due to production delays and weakened liquidity,
and now rate 50% of the group 'B-' or lower. It says although the
outlook for the sector has improved recently, it believes
weaker-than-expected oil and gas prices or cost overruns related to
growth projects could lead to an elevated risk of default for some
issuers in the next 24 months.
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