The global integrated oil and gas business is expected to witness a modest state of stability with the slight increase of crude oil prices and a reduction in operating costs that will continue until 2018, according to a report issued on Monday by the US-based credit rating agency Moody’s Investors Service.
“Over the last year, integrated oil and gas companies have accelerated reductions in their operating costs to adjust to earlier oil-price declines. As a result, most companies’ upstream operations returned to positive net income generation in the second quarter of 2016, while also benefiting from an uptick in the price of crude,” said Moody’s vice-president, senior credit officer Elena Nadtotchi.
According to the report, the cost reduction is expected to slow after the 26% cut in average production costs per barrel of oil equivalent in 2015.
Moody’s expects the industry to generate about $65bn in negative-free cash flow throughout 2016-2017, while several companies are expected to generate positive-free cash flow in 2017. Moody’s also expects to see integrated companies funding deficits through assets sales, new debt issuances, and cash balances over the next 12-18 months.
With the low oil price climate, Moody’s expects the sector’s capital expenditure to decline by 20% on aggregate in 2016 and by 10-15% in 2017.
In terms of debt and its impact on companies’ credit profiles, the report said there would be a gradual recovery until the industry’s net debts have stabilised.
“The high level of investment in 2008-2015 and sustained, relatively high levels of shareholder payments have left the industry with a higher level of debt than in 2008-09, even as [earnings] and operating cash flows declined below the levels seen during the last trough,” the report said.
Moody’s is expecting to see a general improvement of global integrated oil and gas companies’ earnings; however, the sector is also expected to continue facing the same long-term challenges. It will raise its ‘stable’ outlook to ‘positive’ if companies’ earnings before interest, tax, depreciation, amortisation (EBITDA) increases by over 5% annually over the next 18 months. The outlook may be downgraded to ‘negative’ should the companies’ earnings drop by 5% or more, according to the report.
Moody’s has held a ‘stable’ outlook on the oil and gas sector since August 2016 as the low crude prices pulled the sector’s EBITDA to the lowest levels in 10 years.