The Standard & Poor\u2019s and Moody\u2019s ratings agencies recently downgraded energy giants like Chevron, EOG Resources, Royal Dutch Shell and Hass. Top-tier companies, once thought fairly insulated from oil\u2019s downturn due to their sheer size, are now seen as under serious stress. Is this energy issue going to keep getting worse?<\/p>\n
Indeed, more than 120 of the world\u2019s largest energy companies were downgraded following Moody\u2019s revision of its oil price estimate to $33 per barrel from $43. Lower oil for long periods of time mean weakened cash flows and increased financing costs as companies find it more difficult to fund capital projects at current oil prices.<\/p>\n
With U.S. production exceeding oil demand by more than 2 million barrels per day (bpd), and with Iran producing an additional 500,000 bpd in 2016 (with the removal of western sanctions on Iran), rating agencies are convinced it could be years before oil prices recover in earnest. Ratings agencies claim that lower oil coupled with weak industry fundamentals presents substantial risk to corporate health looking forward, hence the downgrade.<\/p>\n
But what does a \u2018downgrade\u2019 really tell us? In reality, it\u2019s nothing more than ratings agencies telling us something we\u2019ve already known for some time \u2013 yes, the Energy sector is under some duress, and risks are rising. But, to downgrade a company one letter (A to B) or one notch of a letter (AAA to AA) doesn\u2019t provide palpable investment insight. It tells us to be on alert, which we\u2019ve already been for months and months. In other words, it\u2019s fair to say that ratings agencies give us a reflection of the market, but are by no means leading indicators.<\/p>\n
Case in point:<\/strong> Standard & Poor\u2019s made headlines in when it downgraded America\u2019s AAA credit rating. But, this rating revision became public only after the U.S. Treasury had publicly claimed that it had its deficit projection wrong to the So, it is clearly evident that the agency is not telling the investor community anything new.<\/p>\n There are also examples of ratings agencies outright failing to perform their function. Perhaps the most notable in history came regarding the 2001 Enron scandal, where the rating agencies didn\u2019t downgrade the company until a few days prior to its bankruptcy! There\u2019s also the fact that Standard & Poor\u2019s agreed to pay a $1.5 billion penalty for failing to assess the exorbitant risks present in the subprime mortgage CDO market. There were even instances where AAA ratings were assigned to large volumes of \u201ctoxic\u201d mortgage-backed securities and collateralised debt obligations before the financial crisis. A huge miss.<\/p>\n Yet, in spite of this track record, rating agencies have emerged pretty much unscathed \u2013 even in a world where many investor decisions to hold a particular type of debt depends on their ratings. Every time a downgrade occurs, it seems to make big news. We\u2019re not sure why.<\/p>\n Bottom Line for Investors<\/strong><\/p>\n Investors shouldn\u2019t get too caught up in downgrades of the minor sort, especially when it\u2019s related to an industry or company that\u2019s already widely known to be feeling some pressures. Ratings agencies are notorious for being late to the game.<\/p>\n","protected":false},"excerpt":{"rendered":" The Standard & Poor\u2019s and Moody\u2019s ratings agencies recently downgraded energy giants like Chevron, EOG Resources, Royal Dutch Shell and […]<\/p>\n","protected":false},"author":1,"featured_media":4124,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[71,72],"tags":[],"class_list":["post-3096","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-private-client-group","category-steady-investor-news"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3096","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=3096"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3096\/revisions"}],"predecessor-version":[{"id":11442,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3096\/revisions\/11442"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=3096"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=3096"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=3096"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}