Despite the recent plunge in oil prices, Moody's Investors Service expects that oil and gas companies will actively manage their liquidity in 2020, reducing capital spending and potentially reducing or suspending distributions to shareholders amid lower operating cash flow and limited access to capital markets.
The recent plunge in oil prices is driven by an acute demand dislocation and the lack of an OPEC+ agreement around production cuts. The current price declines are lower in severity than the commodity price drop of 2015-16.
Moody's said it does not view these as a structural shift at this stage. But the OPEC+ impasse makes investors shift away from riskier assets and increases the risk that speculative grade oil and gas issuers could lose market access.
While this risk may result in rating consequences for some issuers with particularly challenged liquidity profiles and refinancing needs over the next few months, a wave of rating actions based on tightening market access is unlikely at this time, said Moody's in its latest credit outlook.
Heightened price volatility and depressed oil and natural gas prices most directly affect the exploration and production (E & P) and oilfield services (OFS) companies, particularly those facing refinancing needs over the next six to 12 months.
By contrast, the midstream sector benefits from its low commodity-price exposure and protective contracts for gathering, transporting and storing hydrocarbons. The refining sector is balancing the benefit of a sharp decline in feedstock prices with the reduced demand for fuel products in 2020.
A swift, significant collapse in oil prices followed the OPEC+ group of oil-producing nations' failure on March 6 to agree to additional production cuts that would have helped support the market amid demand dislocation from Covid-19 coronavirus.
The nearly immediate 20 per cent decline in oil prices to less than 35 dollars per barrel strains all global oil production and leaves insufficient margin for sustainable replacement of the product.
On March 9, the West Texas Intermediate (WTI) US reference crude price fell to 31 dollars per barrel and the Brent international reference crude price fell to 33 dollars per barrel. The disruption of liquefied natural gas imports by China related to the coronavirus further pressures weak natural gas prices in an oversupplied market.
On top of higher volatility in oil and gas prices for 2020, Moody's now expects that the average WTI price will fall outside our medium-term 50 to 70 dollars per barrel price range in 2020.
While a modest price recovery is likely later in 2020, assuming the coronavirus is contained and economic activities start to normalise, overall 2020 price realisations will still be significantly lower than the 2019 average WTI benchmark price of 57 dollars per barrel.
The spread of the coronavirus has significantly slowed economic activity worldwide, cutting demand for both oil and oil products, particularly in the first half of 2020.
"While the full extent of the economic costs of the virus will be unclear for some time, we estimate that US oil producers and OFS companies have limited exposure to the coronavirus' disruption of supply chains," said Moody's.
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