Scope Ratings has today published its new Oil and Gas Rating Methodology, which lays out Scope’s analytical approach for oil and gas companies. The new methodology improves credit differentiation through an industry-specific credit risk evaluation and a more detailed and nuanced assessment of credit factors. Scope’s approach improves transparency and highlights the relative importance of key rating drivers when analysing oil and gas corporates.

Scope invited market participants to comment on the methodology by 11 December 2023. Scope did not receive comments from market participants during the call-for-comments period. The methodology is now final.

The new methodology can be downloaded here or on www.scoperatings.com.

Rating impact and reviews

The new methodology will not have implications on existing issuer or debt ratings of oil and gas companies covered by Scope.

Methodology highlights

The methodology introduces new rating factors relevant to the determination of a company’s business risk profile. It provides guidance on the competitive position assessment, which for the oil and gas industry is based on three areas:

1. Market position: integration along the value chain, technological level, asset quality, negotiating power with suppliers, governments and other industry players, adaptability of the business model during an energy transition;
    
2. Diversification: exposure to high-risk countries and asset concentration identified as a key risk factor for the industry;
    
3. Operating profitability and efficiency: EBITDA margin ranges calibrated to specific industry sub-segments; the introduction of the new measure: return on capital employed, a complementary profitability measure that is also an indicator of capital efficiency and comparable across the industry’s sub-segments.

The new methodology also provides guidance on assessing credit metrics for oil and gas companies exposed to industry cyclicality and above-average tax rates. It also explains how Scope adjusts its credit metrics for provisions made for decommissioning and restoration.

The new methodology should be read in conjunction with the General Corporate Rating Methodology, which provides rating factors common to all industries such as management, liquidity, legal structure, governance and country risks.

The methodology will apply to new ratings and some existing ones currently rated based on the General Corporate Rating Methodology.