Moody’s Investors Service upgraded New York-based Hess Corp. and Houston-based Targa Resources to “rising stars” status last year as the companies’ financial ratings rose to the investment-grade Baa3 category.

The two upgrades to investment-grade status in 2022 came during “a year when companies accomplished more transformative M&As and debt reduction,” Moody’s analysts Sajjad Alam and Peter Speer wrote Feb. 13 in a report focused on energy sector upgrades and downgrades.

Hess’ rating rose last year due to its “Guyana development and the visible transformation of the company's scale and cash flow generation capacity,” the analysts said. “Debt reduction in the first quarter of 2022 also improved Hess' financial strength.”

Targa’s rating rose, owing to “substantial deleveraging, coupled with a strengthening of its business and simplification of its capital structure,” they said.

Companies with investment grade status have debt that is deemed of sound credit quality. The investment grade debt usually has more favorable credit terms and lower pricing for the borrower.

In addition to Hess and Targa, five other companies achieved potential rising star status by moving to Ba1 with a positive outlook in 2022 due to a combination of lowering debt and improving earnings. The upstream sector was represented by Apache Corp., EQT Corp., and Occidental Petroleum Corp., while the midstream sector was represented by DCP Midstream and Western Midstream Operating.

Upgrades outpaced downgrades in 2022

Russia’s Ukrainian invasion in February disrupted global energy markets, and the uncertainties throughout the year around energy supply and security supported higher commodity prices. While hydrocarbon usage was again on the forefront for many nations, the shift to more sustainable and clearer energy sources continued but was slowed by the Russia-Ukraine conflict.

Oil and gas rating upgrades in the Americas outpaced downgrades for the second year running amid record earnings, improved financial leverage and robust industry conditions, the Moody’s analysts said.

In the Americas, upgrades outnumbered downgrades by 7.1x in 2022 compared to 2.1x in 2021. A year before when markets grappled with the start of the global COVID-19 pandemic, downgrades outpaced upgrades by 0.1x in 2020.

U.S. upgrades/downgrades
(Source: Moody's)

“Industry cycles will continue to influence oil and gas companies' financial performance,” analysts said, “but we expect less robust profitability and cash flow at future cyclical peaks once these initiatives begin to change the trajectory of future oil and gas demand, and we expect cyclical troughs to be lower. Upgrades in 2022 reflected companies' lower debt levels, reduced cost structure and [the] ability to generate free cash flow that enhanced their ability to withstand carbon-transition risk.”

“We expect the pace of upgrades to slow in 2023, now that many companies have achieved their debt reduction and long-term leverage targets, and remain keen on maximizing shareholder distributions,” they added.

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