Credit Default Swaps Suggest Recovery in Oil and Gas Sector

Includes: APC, COP, DVN, RIG
by: Research Recap

Credit default swaps on oil and gas companies tightened nearly 3.7% last week, signaling that perhaps some confidence is gradually returning to the energy markets, according to Fitch Ratings.

Recent CDS spread tightening, along with a fall in theaverage relative differential, indicates that credit markets have stopped pricing in additional risk for the oil and gas industry for the time being. The equity markets also showed some positive sentiment, as the five-year probability of default index for oil and gas companies fell nearly 3%.

The oil spill in the Gulf of Mexico still dominates the market sector despite the latest efforts to cap the well having been called a success., Fitch writes in its latest Risk and Performance Monitor. Potential risks of pressure leaks further down the well remain a concern and will likely continue to represent a dark cloud over this sector. The table below highlights the 10 oil and gas companies for which CDS spreads tightened most over the course of last week. Notably, all companies mentioned are domiciled in North America. CDS on both Devon Energy Corporation (NYSE:DVN) and Conoco Phillips (NYSE:COP) are pricing at levels that are five notches higher than implied by the Fitch Issuer Default Ratings (IDRs). Transocean Inc. (NYSE:RIG) and Anadarko Petroleum Corporation (NYSE:APC), two companies involved in Gulf oil spill, continue to maintain CDS IRs two notches below their Fitch IDRs despite seeing CDS spread tightening of 23% and 22%, respectively.

For each entity, the CDS IR, weekly change in the CDS IR, relative differential, and the gap between its CDS IR and agency rating are included. Based on historical analysis, notch differentials between the CDS IR and agency rating are highly predictive of future rating agency actions. Click image to enlarge.