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Elad Jelasko, Standard & Poor’s credit analyst: "The current structural changes in the thermal coal industry are not uniquely linked to climate change regulation, but result from the emergence of alternative cheaper energy in the U.S. Over the past two years, the price of thermal coal in the seaborne market has been steadily declining--to $75 per ton at present from $105 per ton in early 2012--which is putting pressure on a large part of the industry."
James Leaton, Research Director at the Carbon Tracker Initiative: "It is clear that already in today's market, the economics of exporting U.S. coal do not add up. Investors need to understand where we will see this kind of structural change in the coal market next"
Michael Wilkins, Head of environmental finance at Standard & Poor's: "Financial models that only rely on past performance and creditworthiness are an insufficient guide for investors. By analysing the potential impact of future carbon constraints driven by global climate change policies, our study shows a deterioration in the financial risk profiles for smaller oil companies that could lead to negative outlooks and downgrades. However, the effect on the majors would be more muted"
Simon Redmond, Director in S&P's oil and gas team: "Rating or outlook changes seem unlikely in the very near term, as the scenario is not materially different from the current price deck assumptions. However, as the price declines persist in our stress scenario of weaker oil demand, meaningful pressure could build on ratings. First the relatively focused, higher cost producers, and then also more diversified integrated players, as operating cash flows decline, weakening free cash flow and credit measures, and returns on investment become less certain and reserve replacement less robust."
Carbon Tracker and Standard & Poors have been working together on the implications of carbon constraints for credit ratings of the oil and gas sector.
The effect of limiting emissions translates into a peak demand situation. This has knock on effects for fundamentals such as the price and volume of sales going forward:
- Adjusting the price and demand assumptions to reflect lower emissions levels results in risk of downgrades for pure oilsands operators.
- This scenario puts pressure on cashflows which may result in dividends being cut or projects being cancelled.
- But more fundamentally it questions the business model going forward of investing more capital in tarsands.
- The three oil sands operators analysed have issued US$13.6 billion of corporate bonds, with over 50% of these maturing post-2020. The companies may find a very different context to try and refinance any of the debt which matures in the next few years. The uncertainty around the bonds which mature out to 2042 is not reflected in the current short outlook of a 3-5 year credit rating outlook.
- This research shows that credit ratings need to start looking at alternative futures, as a carbon constrained world will not see past performance of this sector be repeated.