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Fitch Ratings said today that the cash flows of some Europe, Middle East and Africa (EMEA)-focused high-yield oil exploration and production companies have moderately improved due to modest year-on-year improvements in oil prices and a reduction in costs.

Notwithstanding the general improvement in liquidity, Fitch said some companies are still struggling to balance their cash flows, particularly those with higher production costs, significant committed capital expenditure requirements or operations in high-risk countries.

The ratings agency, which published its “EMEA High-Yield Explorations and Production Liquidity Study” today, said the liquidity improvements could also be fragile if recent oil price weakness accelerates and proves to be sustained.

“Liquidity is a key rating factor for smaller exploration and production companies, as was shown by the collapse of Afren in 2015 and Seven Energy's ongoing fight for survival,” the ratings agency said.

“This vulnerability stems from factors including often higher leverage, negative free cash flow and more limited access to banks and capital markets. One of their main sources of funding is reserve-based lending (RBL); many companies' RBL capacities were cut in 2016.”

Reserve based lending is a type of financing where a loan is secured by the undeveloped reserves of oil and gas of a borrower, according to King & Spalding, a London-based law firm.

Fitch said it expects the lending trend to start to reverse in 2017, with RBL debt capacities either being affirmed or moderately increased in the ongoing spring reviews due to modest year-on-year oil price improvements and gradually increasing lending appetite in the sector.

By comparing a company’s sources and uses of cash over the next two years, Fitch said it has determined that US-listed Kosmos Energy, which operates mainly in Ghana, has the strongest position, with over $1 billion of liquidity in 2017. At the other end of the spectrum, Kuwait Energy has a liquidity deficit of $25 million in 2017, while Seven Energy is in the worst position.

Founded in 2004, Seven Energy is the leading integrated gas company in Southeast Nigeria, currently delivering over 110 million standard cubic feet per day (MMcfpd) of gas to three power stations, a cement plant, and a fertilizer factory. The company produced 13,000 barrels of oil per day last year via several upstream assets, including OMLs 4, 38 & 41.

For nine months ended on September 30th, 2016, Seven Energy said after-tax loss fell 85 percent to $11 million, while earnings before interest, taxes, depreciation and amortization (EBITDA) declined by 16 percent to $89 million. The company said cash flow fell 65 percent to $48 million during the period.

“Liquidity positions are generally improving, but they could deteriorate quickly if there were a further sustained fall in oil prices. Our base case is for Brent to average $52.5 per barrel in 2017 and $55 per barrel in 2018, but higher-than-expected growth in US shale production, or the inability of OPEC and some non-OPEC countries to extend production cuts agreed in the second half of last year, could push prices lower,” the ratings agency said.