With so much focus on the oil and gas sector amid the climate crisis, 9fin evaluates the key environmental risks for UK-based HY O&G credits and whether or not they’re prepared.

TLDR;

• O&G regulation is becoming increasingly stringent, and some UK-based issuers are highly exposed already. EnQuest, Ithaca Energy and Harbour Energy, in particular, are likely to feel the effects of the changes to the UK’s O&G tax scheme, while Labour’s decision not to issue any new licences may hit cash generation and delay deleveraging timelines
• 9fin’s analysis reveals that certain HY issuers are grappling with significant decommissioning liabilities while being heavily dependent on the North Sea, putting them at the highest risk of spiralling costs
• HY O&G credits are often highly leveraged, making the cost of capital crucial to their long-term success. Yet, many companies are failing to align with investor strategies, risking access to new capital in the future
• Issuers are doing little to diversify revenue and benefit from government subsidies related to renewable assets and carbon capture. This could threaten cash flow resilience during the transition

There’s a common misconception that the O&G sector will eventually die out, due to either the exhaustion of provable oil reserves or the clean energy transition halting global oil demand. In a simplistic world, this would mean O&G companies would eventually have nothing to sell, and no one would need to buy it.