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Global Credit Research - 03 Jan 2017
New York, January 03, 2017 -- Oil prices likely will remain volatile and range-bound in the coming
year, Moody's Investors Service says in a new report discussing
its expectations for the global oil and gas industry. Alongside
anticipated changes in US energy policy focused on domestic development
and deregulation, the industry will see increased merger & acquisition
(M&A) activity in both the North American E&P and midstream sectors.
The rating agency's oil and natural gas price estimates --
within a medium-term oil price band of $40-$60/bbl
for both Brent and West Texas Intermediate (WTI) crude globally and in
North America -- remain unchanged for 2017-19 from its November
2016 update. Moody's expects prices to remain volatile within
"We foresee three possible scenarios for oil prices in 2017,
each with their own impact on ratings," says Moody's
managing director, Steve Wood. "If they retreat to
the low $40s, stress in the oil and gas industry will again
increase, while prices in the mid-to-high $40s
would continue to offer some relief for oil producers. At a sustainable
mid-$50/bbl level, however, we could take more
positive rating actions on integrated and exploration and production companies."
Under the Trump administration, US energy policy likely will prioritize
domestic oil and coal production, in addition to reducing federal
regulatory burdens. Energy infrastructure projects would benefit
most immediately, but the success of other policy goals, such
as easing the permitting and leasing of new coal mines, will depend
on their ability to generate favorable economic returns. Meanwhile,
a US failure to work toward the Paris Climate Agreement commitments could
lead to a carbon tax on US exports or other retaliatory trade measures.
Increasing confidence in the oil and gas industry's prospects will
spur acquisition activity among North American exploration and production
(E&P) firms, Moody's says. Debt and equity markets
are again offering financing for producers seeking to re-position
and enhance their asset portfolios after a lull. M&A will also
pick up in the midstream sector. At the same time, integrated
oil and gas firms will continue to improve their cash flow metrics and
leverage profiles by cutting operating costs, further reducing capital
spending and divesting assets.
Even so, the oilfield services and drilling (OFS) sector is in for
another tough year, with continued weak customer demand, overcapacity
and a high debt burden.
"Demand for the services of OFS companies will grow only very gradually
next year, while pricing recovery and cash flow growth will lag
those of upstream customers by at least a year," Wood says.
"Within the broader energy sector, we expect the OFS sector
to suffer the most defaults in 2017 as more companies run out of cash
and credit lines, struggle with debt covenants and maturities and
produce barely breakeven cash flow."
Meanwhile, EBITDA growth of 5% or less in 2017 will strain
the North American midstream sector's ability to reduce debt leverage,
in some cases putting investment-grade ratings at risk.
Midstream growth capital spending will again drop by about 20%,
with slower growth leading more companies to resort to "self-help"
measures to address balance-sheet, funding and distribution
And though funding risk has declined somewhat for Latin America's
national oil companies, it will remain an issue for years to come,
given tight capital market conditions and volatile oil and gas prices
and cash flows, Moody's says. Meanwhile, Russia's
agreement to cut oil production next year poses little difficulty for
the country's oil companies, since the move effectively freezes
production rates and likely will entail the resumption of cuts in Western
Siberia, which is already in decline.
Moody's research subscribers can access this report, "Oil
and Gas Industry -- Global: Industry Settles in for Another
Year of Tepid Prices and Tight Spending Budgets in 2017,"
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