Moody's: Global Integrated and E&P Sectors Shift to Stable on Cost-reduction, Business Efficiencies and Oil Price Uptick

Buoyed by an expected recovery in oil and natural gas prices, alongside greater business efficiencies and cost-reduction efforts, Moody's changed its industry outlooks for both the global integrated oil and exploration and production (E&P) sectors to stable from negative. This marks the first change in outlook to stable for both sectors in nearly two years.

For the cyclical E&P sector, EBITDA has stabilized following a precipitous drop in cash flow, with prices for oil and natural gas recovering somewhat from a deep trough in the first quarter of 2016. And even as E&P restructurings and bankruptcies are expected to continue until commodity prices stabilize above breakeven levels, the larger, better-capitalized E&P companies' growth will offset the smaller, leveraged companies' weakness, leading to overall sector stability and eventual growth.

 

"Stress in the E&P sector led to a surge in debt restructurings and bankruptcies in 2015-16, with many established companies succumbing to the tough operating environment," noted Amol Joshi, a Moody's Vice President. "But significantly, efficiency gains, cost reductions and the shutting down of expensive marginal production have reduced breakeven costs for a leaner E&P sector -- a positive in what's otherwise been a challenging operating environment."

For integrateds, Moody's change in outlook to stable reflects expectations that the companies' dominant upstream divisions are unlikely to deteriorate further following their accelerated cost-cutting efforts and higher realized oil prices.

"Based on Moody's oil price estimates, the sector is not likely to generate sufficient operating cash flows to cover reduced capital spending and cash dividends until 2018," noted Elena Nadtotchi, a Moody's Vice President. "Consequently, we expect integrated companies to continue to execute on the announced asset sales plans to help plug negative free cash flow in 2016-17."

The sector's EBITDA declined by around 40% in 2015 and is anticipated to fall further by roughly 10% in 2016 overall, owing mainly to lower oil prices in 2016 and weak operating conditions for refining. Even so, integrated companies substantially realigned cost structures to lower oil prices, which -- along with expected production growth -- suggests these companies are positioned to generate cash flows and positive earnings at current prices.

Nevertheless, integrateds face longer-term challenges of raising returns on capital at $40-$60/barrel oil prices, and delivering profitable growth in production beyond 2020.

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