Global credit rating agency DBRS is warning that if Canada’s crude oil price woes drag on without improvement, it could negatively affect the credit ratings of energy companies that rely on Western Canadian oil.
The Toronto-based firm said in a commentary Wednesday that while global and U.S. oil prices have dropped, Western Canadian producers have been under even “greater duress” as Canadian benchmark prices have fallen even more.
Generally, integrated energy companies — those that own refineries and gas stations — have been able to weather the steep price discounts. But other, less diversified producers have struggled.
If the bottlenecks making it difficult to get more oil to U.S. markets continue unabated, DBRS says producers that rely on Western Canadian energy production are at risk of “a material degradation in cash flow and resulting key credit metrics.”
“This has happened quickly and it is of concern,” Victor Vallance, senior vice president of energy at DBRS said in an interview. “And if it stays this way for some period of time, it will likely cause us to take action on our ratings and lead to downgrades.”
A shortage of pipeline capacity and oilsands production growth has led to bottlenecks that widened the usual price gap between Canadian crude and the American benchmark.
For weeks, the price of Western Canadian Select (WCS) has been tracking roughly $40 US a barrel less than West Texas Intermediate. In better times, it might track around $15 below.
The widened oil price discount is costing some companies and the government dearly. Analysts have said both are losing tens of millions of dollars every day because of the discounts.
DBRS didn’t name any particular companies that could come under credit scrutiny as a result of the Canadian price discounts.
But Vallance said the agency would determine within six months whether action would be necessary.
“It really comes down to seeing an improvement in pricing and that would be related to getting more transportation capacity in place and/or seeing additional production being shut in beyond what’s shut in currently,” Vallance said.