Global credit ratings agency warns of downgrades in Canadian oilpatch if crude price woes persist

Global credit rating agency DBRSis warning thatif Canada'scrude 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 Wednesdaythat 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 thatown refineries and gas stations have been able to weather the steep price discounts. But other, less diversified producershave struggled.

If the bottlenecksmaking it difficult to get more oil to U.S. markets continue unabated, DBRSsaysproducers that rely on Western Canadian energy productionare 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 presidentof 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 ourratings 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 beentracking roughly $40 US a barrelless than West Texas Intermediate (WTI). 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.

DBRSdidn'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.

"Itreally 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.

Vallancesaid the discounts themselves weren't unexpectedgiven the sector's challenges in getting market access.

"But I think it's the level of discounting that's surprised most people in the industry and I think in the investment industry as well," he added.

Vallancesaid it remains to be seen how long the discounts will continue.

Some analysts expect the discount to fall once the situation returns to more normal conditions next year.

Scotiabankeconomists expectthe gap will average about $24 US a barrelthrough 2019 as oil production throttles back, U.S. refineries complete maintenance workand crude shipments by rail ramp up.

But SamirKayande, director at RS Energy Group, isn't looking for the discountsto return to normal until this time next year. That'sroughly whenthe Enbridge Line 3 pipeline project from Alberta to Wisconsin is expected to be complete.

Kayandesaid rail shipments of crude should ramp up slowly but steadily, which should help.He said improvements in pipeline efficiencies would also be a positive. But he's not counting on a quick fix.

"We've seen some small improvement in [price differentials] but it looks as though it's related to just WTI falling,which is of course not bullish," Kayande said.

The Alberta government is looking for a short-term fix, appointing three envoys to work with industry on finding solutions.

Some companies and now Alberta's United Conservative PartyLeader Jason Kenney arecalling on the provincial government to enact mandatory production cuts to correct the supply glut that's weighing downprices.

But large integrated companies likeSuncor, Husky Energy and Imperial Oil rejectthe idea because they saythe market is working and that mandatory cuts also pose trade risks.

On Wednesday, Alberta Premier Rachel Notleyannouncedher government will buy two new unit trains that can transport an additional 120,000 barrels a day, increasing the amount of oil being moved by rail in Canadaby a third.

Kenney said the rail car purchase might be useful in the "midterm" but does little to help immediately close the price gap.