Moody's Investors Service has downgraded the debt of Suncor Energy Inc. and its soon-to-be-acquired Candian Oil Sands Ltd., citing the impact of weak oil prices.
In Canadian Oil Sands' case, Moody's cut its rating to junk status, despite the impending Suncor takeover.
It said Suncor, Canada's largest oil company, is dealing with worsening measures of cash flow and debt levels but it pointed out that its healthy refining and marketing business provided a cushion for weakness in the production arm.
Moody's lowered its senior unsecured debt rating on Suncor to Baa1 from A3. The level is still considered investment grade.
This year, oil prices have slumped below $30 (U.S.) a barrel from $100 about 20 months ago, crimping returns across the oil industry and worsening the ratio of debt to cash flow, a key measure of determining creditworthiness.
In December, Moody's put Suncor and numerous other Canadian energy firms under review for possible downgrade in response to the market downturn.
Last week, Suncor said a majority of Canadian Oil Sands (COS) shares were tendered to its all-share, $4.2-billion takeover bid for its partner in the Syncrude Canada Ltd. joint venture. It has already replaced the COS's board and management.
Moody's cut its senior unsecured debt rating on COS to Ba3 from Baa3, which is in speculative, non-investment-grade territory. It cited the company's all-in operating costs at Syncrude of $55 (Canadian) a barrel as part of the rationale for the downgrade.
"The downgrade of Canadian Oil Sands Ltd. reflects its very high cost base and Moody's expectation of very high leverage and weak interest coverage in 2016 and 2017 in the currently very weak oil price environment," Terry Marshall, Moody's senior vice-president, said in a statement. "COS's rating is supported by its long-lived, low-decline reserves and its ownership by Suncor Energy Inc."
The rating outlook for both issuers is stable, the agency said.