Morningstar DBRS' Takeaways from 2025 Credit Insights Calgary: Increased Transparency for Energy Sector Credit Ratings and Current Trends in the O&G Market

As part of its takeaways series, Morningstar DBRS is publishing several write-ups from Credit Insights Calgary, a well-attended event that looked at credit market conditions influenced by geopolitical tensions, tariffs and counter-tariffs, changing interest rates, and the Canadian federal election. Participants in the energy sector are facing an uncertain and dampening market. Conversely, the digital infrastructure space continues to grow, driven by the digitization of the global economy.

Ravikanth Rai, Senior Vice President and Sector Lead, outlined some of the changes that have been made to the "Global Methodology for Rating Companies in the Oil & Gas, Oilfield Services, and Pipeline and Midstream Energy Industries" to provide greater transparency about how Morningstar DBRS' weights the factors it assesses and the process it follows to assign ratings. Arthi Sambasivan, Managing Director, Corporate Ratings, Asset, Project & Sports Finance, followed up with specific questions on the credit rating process and some of the current trends in the market.

"The first change we made was to widen our credit rating ranges to better capture the credit profiles across the spectrum from AAA to CCC," Rai said. "Hopefully, we can cover a wider range of credits with the new methodology."

The second, and probably more important, change is the greater transparency on how Morningstar DBRS rates issuers in this sector. "I've had discussions with a lot of you here in the room as to how our ratings are actually decided and what are the weights that we use for each of our Business Risk Assessment (BRA) factors and Financial Risk Assessment (FRA) metrics," Rai said. "And we've taken that into consideration." The new methodology explicitly shows the weights associated with each BRA factor and FRA metric and clearly outlines how the two assessments are combined to form the final rating.

The new methodology also allows for better comparability across issuers. For example, if an issuer with an FRA of BB has weak liquidity, that is now factored directly into the FRA metric through the FRA adjustment, rather than by using an overlay under the old methodology. Because of that direct adjustment, the new FRA metric would likely be B (high) rather than BB under the old methodology. Thus, with this change, two issuers can be more easily and clearly compared.

Sambasivan followed up with specific questions for Rai and moderated the Q&A session from the audience.

Q: If the Carney government decides to proceed with legislation putting an emissions cap on Canada's oil and gas sector, will it have a negative credit impact overall on the sector?

A: "We believed the legislation proposed by the previous government would definitely lead to lower production from Western Canada," Rai said. "But that lower production might not affect the credit ratings, given the very strong balance sheets." While reduced production generally means reduced cash flow, if the reduction in production is not material and the company's leverage profile keeps up with that lower cash flow, there may not be much of an effect on its credit ratings.

Q: Have our rated pipeline and midstream issuers focused on any particular projects or developments that support more attractive investment returns or growth? And how do you view this from a credit perspective?

A: Investment in natural gas assets has clearly increased over the last couple of years as the demand for natural gas in North America has become more and more bullish. A lot of infrastructure investment is going toward building pipelines to meet that demand. From our perspective, as long as those assets are backed either by strong contracts or are rate regulated it should be credit neutral. However, if there is additional commodity exposure that comes through because of those projects, it could have a negative impact on ratings. Liquids infrastructure projects are also a growing segment in Canada; however, it could potentially bring additional commodity price and volume risk, which could also be a negative.

Q: How do mergers and acquisitions affect credit ratings? Are they credit positive, credit negative, or credit neutral?

A: "The effect on credit ratings depends on what the acquisition achieves," Rai said. If it brings synergy or diversification, adds scale or something new, or if the combined company is better than each entity on its own, then it can definitely be credit positive within the BRA consideration. The second consideration is funding. "A large, debt-funded acquisition might make us nervous," Rai said. "But if there's a significant equity component to the acquisition or if the company has a credible plan to reduce the debt that the company is raising for the acquisition over the next 12 months, then we would probably take a more measured approach."

Q: The return of capital is a consistent theme in the sector. Do share buybacks and dividends make a difference from a credit perspective?

A: "As long as they've finished their broccoli, they can have that dessert," Rai quipped. "As long as leverage stays within the limits we have for the rating category, share buybacks and distributions are fine."

AUDIENCE Q: Where is political risk factored into the credit rating analysis?

A: The BRA adjustment includes political risk. For example, if regulations or political considerations in a certain geography or region affect the building of a pipeline sector project, there will be a negative overlay. "When you compare that issuer with another in a different geography, if everything else is equal, the issuer with the political risk is rated lower. "

AUDIENCE Q: With the current bear market in North America for midstream and depressed West Texas Intermediate prices, what is your take on growth projects versus balance sheet health? What could companies do to potentially improve their credit ratings?

A: "Reduce debt," said Rai. "If growth is being achieved through operating cash flow, we are generally okay with it. It's only when companies start borrowing to grow in a macro environment where the outlook for commodity prices is a little murky, that's when you could possibly see a negative rating action.

Written by Deirdre Maclean

NOTES:
For more information on this industry, visit https://dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

To see Ravikanth Rai's slide deck from Credit Insights Calgary, please see Related Documents below.

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