The substantial decrease in commodity pricing within the energy sector over the past two years has caused significant financial stress within the energy industry and beyond. Over that time, we have witnessed crude oil fall from a 2014 high of over $105/bbl to a 2016 low of under $30/bbl. Likewise, natural gas fell from a 2014 high of over $6/mmbtu to a 2016 low of under $1.70/mmbtu. These price decreases have not only hit hard the bottom line of producers in the energy industry, but have actually threatened the survival of some of them.
Moody’s Investors Service is expecting the corporate default rate in 2016 to rise 30% to its highest rate since the financial crisis of 2008-2009:
“The agency’s oil and gas Liquidity Stress Index (LSI) hit a record high of 27.2% in February, surpassing the previous high of 24.5% hit during the Great Recession.”¹
“‘Commodity-related issuers remain the most at risk,’ said Moody’s. ‘In 2015, the metals and mining sector had the highest default rate, at 6.5%, followed by oil and gas, at 6.3%.’” ²
Moody’s has made several other statements indicating 2016 could be a very ugly year for corporate defaults in the energy sector.
The financial stress in the energy industry significantly elevates the attention levels that should be given to credit risk management within the sector. Whether you are a producer, converter, consumer or other energy industry-related business, it is now extremely important that you are proactively looking at the credit worthiness of your suppliers and customers. It is imperative that you are not only monitoring the viewpoints of the credit rating agencies, but are also actively monitoring both the individual counterparty risk levels as well as the aggregated risk levels across credit rating groupings. Attend our free, Credit Risk Management webinar to learn more.
If you are only monitoring aging accounts receivable via your company’s accounting or ERP system, you could be missing a substantial piece of the entire picture. Having a clear picture into the forward-looking credit exposure to a counterparty and credit rating group can be of greater importance than the A/R exposure based on past sales and past credit worthiness.
This is where having a credit application within your ETRM system can be most helpful. An ETRM system that is properly configured to contain all commodity exposures as well as invoicing and payment transactions can give you real-time insight into your credit exposures.
The Allegro Credit 8.2 component is able to provide its users with up-to-date credit exposures covering both open A/R exposures as well as exposures to transactions that have not yet been executed. It gives you the ability to customize how you value future transactions between full-invoicing value or market-to-market – and in what time frame. Additionally, the module allows you to apply stress testing to commodity pricing, simulate credit events and analyze potential future exposures over various timelines.
capSpire has helped clients get the most out of their Credit 8.2 license by providing configuration and customization guidance. Attend our free, Credit Risk Management webinar on Tuesday, March 22nd at 10am CT and get the most out of your Credit Risk Management function.
¹ – Quote from MarketWatch article “Stress in oil credit market is now at record levels” by Ciara Linnane – Mar 3, 2016
² – Quote from MarketWatch article “Corporate defaults expected to rise 30% in 2016, days Moody’s” by Ciara Linane – Mar 1, 2016
capSpire is a global consulting and solutions company serving the Commodity Trade and Risk Management sector of the energy industry. Headquartered in the growing technology hub of Fayetteville, Arkansas, with an office in Tulsa, Oklahoma, capSpire has served over two dozen clients across North America and Europe. capSpire provides its clients with deep business and system expertise to simplify and streamline its commodity management functions for crude, natural gas, refined products, NGLs, coal, iron ore, agriculture and freight. Chief among its service offerings are IT strategy and planning, system selection, bespoke software development, implementation services, systems integration, complex enterprise content management and ongoing support.