A new report from Fitch Ratings has highlighted that the steep decline in the price of West Texas Intermediate (WTI) crude oil, from over US$100/bbl to less than US$50/bbl has exposed many oil dependent issuers across multiple sectors to heightened risks as a result of significant declines in revenues and cash flow. The report also seeks to put the financial impact of the oil price decline in perspective, mapping sensitivities to a prolonged low oil price scenario across a disparate set of energy dependent sovereigns, corporate and US states.
Key findings
Among oil rich sovereigns, the impact of an extended low crude price scenario on external revenues depends greatly on the diversification of a country’s export base. Weak business environments and institutional frameworks can hinder diversification. Fitch Ratings has also said that many exploration and production companies with the greatest exposure to falling crude prices show relatively limited variation in their sensitivity to an extended price shock. However, significant differences in asset profiles and leverages help explain increased vulnerability among some corporate issuers in the analysis.
Scenario
For five US states with heavy dependence on the energy industry, an extended US$50/bbl scenario would drive a sharp decline in oil related revenues. The extent of a state’s vulnerability, however, depends greatly on the relative contribution of oil production taxes to the state's operating budget.
Edited from press release by Claira Lloyd