Oil and gas sector's liquidity stress deteriorates to "worst-ever level", Moody's says

Liquidity stress in the oil and gas sector, as measured by Moody’s, has deteriorated to levels last seen in 2009; the worst on record since the ratings agency began researching the issue.

In a note to clients, Moody’s said its oil and gas Liquidity Stress Index (LSI) surged to a record high of 27.2% following the downgrade of the ratings of 19 energy companies stateside in February. The energy LSI has now surpassed its previous high of 24.5% during the last recession, it added.

February marks the biggest month ever for liquidity downgrades, with the ratings of 17 energy exploration and production (E&P) companies among the 25 total companies downgraded. Ten E&P companies' liquidity ratings were cut to SGL-4, Moody's lowest liquidity rating, along with one energy oilfield services company.

John Puchalla, a Moody's analyst and senior vice president, said, “Prolonged weakness in energy sector credit conditions is driving the sustained increase in the LSI. Energy liquidity downgrades came as part of our ongoing review of oil & gas companies globally in light of the weaker price environment."

Moody's composite Liquidity Stress Index jumped to 8.9% in February from 7.9% in mid-January; now at the highest level since November 2009.

"The composite LSI has been increasing since November 2014 and has moved above its long-term average. This progression signals that the default rate will continue to rise as the year progresses," Puchalla added.

Most liquidity strains continue to relate to commodity price weakness and the resulting derivative effects.