OREANDA-NEWS.  Depressed oil prices may stretch the liquidity of smaller exploration and production (E&P) oil firms operating in EMEA, but much depends on individual circumstances, Fitch Ratings says. Companies with strong 2015 hedging positions, low lifting costs and leverage, and committed credit lines are better positioned to survive the downturn compared with companies with volatile production, a high proportion of short-term debt or reliance on reserve-based lending.

We view liquidity, or the ability to meet short-term obligations, as a key rating factor for small E&P companies, which are typically rated in the mid-to-low 'B' category. They are more vulnerable to liquidity problems than bigger producers because of concentrated production, higher leverage, negative free cash flows, and more limited access to capital markets. Depressed oil prices significantly exacerbate these weaknesses.

At the beginning of the year many oil companies assumed a USD50/bbl-60/bbl range for Brent in their budgets, but in the last few days Brent has traded below USD45/bbl, the lowest level since 2008. Small players producing oil from only a few assets face a much higher risk that output will fall short of expectations and current prices will considerably squeeze their cashflow.

Afren ('D') is a good example. The company's woes started a year ago with a corporate governance scandal over unauthorised payments to the management, but we believe the major driver of its fall was low oil prices coinciding with falling output from Ebok, Afren's flagship oilfield. Lower production in 2015 meant that the original re-capitalisation plan proposed by Afren in April 2015 proved too optimistic, and the company was forced to enter administration in August 2015.

Another threat that small players may face is a reduction in the amount they can borrow under their reserve-based lending (RBL) facilities. These are normally secured by a particular producing asset, and the borrowing base depends on the projected cash flows that the asset is expected to generate. Re-determination rules may differ, and historically borrowing bases have fallen more slowly than oil prices, but companies with higher reliance on RBL and limited access to other sources of liquidity may find themselves at a higher risk of default when oil prices decline.

Factors that should help oil firms successfully navigate the current storm include a strong hedging position in 2015, although this will be almost impossible to replicate in 2016, and access to various liquidity sources.

Kosmos Energy ('B/Stable'), a US company with assets offshore Ghana, seems one of the better-prepared companies in this respect. We estimate that at end-1H15, 60%-70% of the company's 2H15 and 2016 production was hedged at USD89/bbl and USD82/bbl, respectively. In 1H15, the hedging programme brought Kosmos USD93.5m of additional gain compared to its total 1H15 EBITDAX of USD235m. This allowed the company to proceed with its ambitious exploration and development programme. At end-1H15 the company had USD1.9bn of liquidity consisting of cash and committed credit lines, and no short-term debt.

We view Kuwait Energy's (B-/Stable) liquidity as adequate, due to low leverage and well-balanced debt repayments. At 31 May it had USD171m cash and no debt maturities until 2017. Its maturities will peak in 2019 with USD272m due.