Ovintiv Inc. Downgraded To 'BBB-' On Lower Oil And Natural Gas Price Assumptions; Outlook Negative

  • We recently lowered our crude oil and natural gas price deck assumptions, including Brent crude to $30/bbl and WTI to $25/bbl for the remainder of 2020. We also revised our Henry Hub natural gas prices assumption to $2.00/mmbtu for the rest of the year.
  • As a result, we expect independent oil and gas exploration and production company Ovintiv Inc.'s cash flow/leverage measures to fall below our expectations for the 'BBB' rating.
  • We are lowering our issuer credit rating and unsecured debt ratings on Ovintiv to 'BBB-' from 'BBB'. We are also revising our short term and commercial paper ratings on Ovintiv to 'A-3' from 'A-2'.
  • Our negative outlook reflects the potential for a downgrade if we expected FFO/debt to fall below 20% for a sustained period. This would most likely occur if realized oil and natural gas prices remain weak and the company did not take further steps to reduce capital spending.
NEW YORK (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions listed above. We estimate cash flow/leverage measures will fall below our expectations for the rating over the next two to three years. Based on our revised oil and natural gas price deck assumptions (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020), we now expect Ovintiv's funds from operations (FFO) to debt to fall to the 20% to 25% range in 2020 through 2022, from over 35% in 2019. The company has over 70% of its crude oil and natural gas production hedged in 2020, limiting the cash flow impact of lower prices, however these hedges roll off in 2021.
The negative outlook reflects the potential for a downgrade if we expected FFO/debt to fall below 20% for a sustained period, which would most likely occur if oil prices averaged below our current price assumptions and the company did not take further steps to reduce capital spending. We currently estimate FFO/debt in the 20% to 25% range over the next two years. In addition, given the currently wide yields on the company's long-term debt (~20%), we believe it will likely put its upcoming $1.35 billion of debt maturities on its credit facilities which, along with negative discretionary cash flow next year, could begin to pressure liquidity.
We could lower ratings if we expected FFO/debt to fall below 20% for a sustained period. This would most likely occur if realized oil and natural gas prices and resulting cash flows remain weak without a further reduction in capital spending. We could also take a negative rating action if the company does not address its upcoming debt maturities in a timely manner.

We could revise the outlook to stable if FFO/debt approached 30% for a sustained period. This would most likely occur if commodity prices rise more quickly than our current expectations and the company continued to exercise capital discipline.
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