The E&P sector has spent the last few quarters building its financial strength, lowering finding and development costs and keeping an eye on steady growth. Companies such as Burlington Resources and Occidental Petroleum have done so well at these measures that, if oil prices dropped back to $30 to $35, they would still be doing well, according to Standard & Poor's director and senior analyst John Thieroff. Yet despite the sector's amazing earnings growth, it's way too soon to start handing out credit-rating upgrades, he said at an S&P conference in Houston recently. "We expected to upgrade a lot more than we have," Thieroff said. "But understand that it's difficult to rate companies in an environment of $70, $60 or even $50 oil. We have to evaluate creditworthiness for the long term, so we don't get any comfort from near-term pricing. But it's a good sign when companies take excess cash flow and improve overall financial strength. In 2002, S&P made almost 60 energy-space credit-rating downgrades and approximately 22 upgrades. The ratio has slowly evened out over the years, and so far in 2005 it has made approximately 25 downgrades and 17 upgrades. Andrew Watt, an S&P director, said that while ratings actions for 2005 are becoming more balanced between upgrades and downgrades, a number of negative ratings on E&P companies have been due to financial-policy decisions such as share repurchases. He named Kerr-McGee's $4-billion stock-repurchase plan as one example of prompting a recent credit downgrade and Pioneer Natural Resources' $1-billion repurchase plan as the trigger for a CreditWatch flag. For more on this, see the October issue of Oil and Gas Investor. For a subscription, call 713-993-9320, ext. 126.