MOODY'S CUTS CANADA
Moody's Investors Service on Monday cut the credit rating of Canadian Oil Sands Ltd. to one notch above speculative grade, citing the oil-sands producer's "elevated leverage" as a result of lower crude oil prices.
The rating action targeting the largest owner of Canada's giant Syncrude oil-sands mining consortium comes amid a swoon in oil prices below $40 a barrel, which has eroded profit margins in the energy industry and made it more difficult for highly-levered oil producers to service their debt loads.
Moody's lowered its creditworthiness assessment of Canadian Oil Sands' senior unsecured debt to Baa 3 from Baa 2 and kept its "negative" outlook for the Calgary-based company. Baa 3 is Moody's lowest rung of investment-grade credit and just above the speculative, or junk, grade.
"Moody's expects negative free cash flow [at Canadian Oil Sands] of about 125 million Canadian dollars ($94 million) from June 30, 2015, to September 30, 2016, to be largely debt funded," it said.
The ratings action was prompted by the recent tumble in crude prices to more than six-year lows and Canadian Oil Sands' deteriorating balance sheet.
Prices for West Texas Intermediate, the U.S. oil benchmark, fell $2.21, or 5.5%, to $38.24 a barrel in trading Monday on the New York Mercantile Exchange, the first settlement below $40 a barrel since February 2009.
The rating could be reduced to junk grade if Canadian Oil Sands' debt-to-earnings ratio doesn't improve, which is likely "if WTI prices were expected to remain below $60 a barrel," Moody's said.
A representative for Canadian Oil Sands said the company was aware the Moody's action was imminent, but said it wasn't expected to affect its near-term financing costs. "We knew this was coming—it's a reflection of the decline in oil prices," said Canadian Oil Sands spokeswoman Siren Fisekci.
Last month, the company reported a net loss of C$128 million, or 26 Canadian cents a share, in the three months to June 30, compared with a net profit of C$176 million, or 36 Canadian cents a share, in the year-earlier period.
Canadian Oil Sands said its net debt level rose to C$2.4 billion as of June 30, up from C$2.2 billion in the previous quarter. The company's debt-to-capitalization increased to 37% from 25% a year ago, but it said that ratio would decline later this year.
Canadian Oil Sands holds a 37% stake in Syncrude, with six other companies owning the remainder, including the lead operator, Exxon Mobil Corp. unit Imperial Oil Ltd., and Suncor Energy Inc., Canada's biggest oil and gas company.
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