Crude oil slip to cause 40% spending cut by oil firms globally: Moody's

Offshore contract drillers likely to have their toughest year since 2009

The ongoing slide in the price of crude oil might force oil companies globally to lower their spending by up to 40 per cent in 2015, credit rating agency Moody’s has said. Exploration and production (E&P) companies could be the first to be hit, while oilfield services (OFS) and midstream energy operators might feel the knock-on effects of reduced capital spending in the E&P sector.

Earlier, a Goldman Sachs report had in December said global oil producers would lose $1 trillion as they will be forced to shut unviable projects, with oil at around $60 a barrel. The report, after a research involving 400 wells awaiting investment decisions across the world, had said the total investment at risk was $930 billion, and oil companies would need to reduce their expenses by 30 per cent to make their projects viable — provided the oil price remains at around $70 a barrel.

According to Moody’s, offshore contract drillers are likely to have their toughest year since 2009, even as integrated oil majors are the best positioned to react to lower prices. “If oil prices remain at around $55 per barrel through 2015, most of the lost revenue will hit the E&P companies’ bottom lines which will reduce cash flow available for re-investment,” said Steven Wood, managing director (corporate finance), Moody’s. “As spending in the E&P sector diminishes, oilfield service companies and midstream operators will begin to feel the stress.”

The drop in crude oil prices to around $55 a barrel from $95 a barrel in July last year reflects growing supply from non-Organization of Petroleum Exporting Countries (Opec) nations, particularly the US; a slowing increase in global demand and Saudi Arabia’s decision of not continuing to act as Opec’s swing producer.

While E&P companies outside North America will likely reduce spending in a range between 10 per cent and 20 per cent, depending on prices, North American E&P companies will reduce their capital spending by around 20 per cent from the 2014 level, if oil prices average $75 a barrel in 2015. If they slipped below $60 a barrel, spending might be cut by 30-40 per cent, Wood said in the report ‘Lower Oil Prices in 2015 Reduce E&P Spending and Raise Risk for OFS Sector’.

The OFS sector’s earnings will fall 12-17 per cent if oil prices average $75 a barrel, while an average price below $60 a barrel could drive earnings down by 25-30 per cent. “Although the world’s largest OFS companies — Schlumberger, Halliburton and Baker Hughes — are all sufficiently strong to weather a sustained drop in oilfield activity, smaller companies like Basic Energy Services and Key Energy Services will come under greater stress,” Moody’s said.

Major integrated oil companies will fare better, the report said. “Integrated oil companies have been more measured in their response to falling oil prices, typically making investment decisions assuming prices of no more than $50-$60 a barrel, since projects can take years to complete. ExxonMobil, Royal Dutch Shell and Total have announced spending reductions for 2015 while cuts at others, including Chevron and BP, look likely.”

The report also discussed the impact of lower oil prices on China, Mexico and Russia. China is the world’s largest net importer of crude oil and will benefit from the drop in oil prices. Mexico’s development as a result of energy reform will be delayed. Russia’s lower oil export duties help its oil companies but add to an already oversupplied market.