DBRS Morningstar Releases Commentary "One Year into the Pandemic, Oil and Gas PDP Securitizations Remain Stable"
ABCP, Auto, RMBSDBRS, Inc. (DBRS Morningstar) released a commentary titled “One Year into the Pandemic, Oil and Gas PDP Securitizations Remain Stable” that addresses the current state of the market overall and how asset-backed security (ABS) ratings in the sector have performed. “Despite the volatility in oil and gas market prices and in production, oil and gas proved developed producing (PDP) securitizations have exhibited much less volatility throughout the pandemic, largely because of commodity price hedges and structural features of the securitizations,” said Stephanie Mah, Vice President, Structured Finance Research.
In an oil and gas PDP securitization, oil and gas production is typically hedged for several years, mitigating stress on the securitization potentially caused by declining market prices. “The importance of highly rated hedge counterparties is critical during negative price volatility, underscoring the counterparty’s ability to continue honoring such protections in a stressed environment,” said Joshua Gatmaitan, Senior Vice President, U.S. ABS. Nonetheless, transactions are still sensitive to long-term price trends. A portion of production may not necessarily be hedged, exposing the collateral to price volatility. In addition, curtailments of any kind can elevate risk during extreme market dislocations.
Notwithstanding the volatility in oil and gas prices, along with price hedges, there are also other structural features often found in oil and gas PDP securitizations that mitigate deteriorating underlying collateral performance. For example, amortization triggers can be tied to debt service coverage ratio and other performance-related metrics, such as production tracking rates. DBRS Morningstar has a stable outlook on the oil and gas PDP ABS sector.
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The commentary is available at www.dbrsmorningstar.com.
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