Earnings in the rated integrated oil and gas sector will stabilize over the next 12-18 months, supported by higher oil prices and lower operating costs driving a steady improvement in the profitability of companies’ dominant upstream exploration operations, says Moody’s Investors Service in a new report published today.
Moody’s outlook for the sector has been stable since August 2016.
Moody’s report, titled “Integrated Oil and Gas — Global Oil Price Uptick, Accelerated Cost Cuts Put Upstream Activities On Road to Recovery”, is available on www.moodys.com.
“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,” says Elena Nadtotchi, a Moody’s Vice President — Senior Credit Officer and author of the report.
Moody’s expects the pace of upstream cost reduction to slow after the industry delivered a 26% cut in average production costs per barrel of oil equivalent (boe) in 2015. Volume growth in the sector will remain flat as companies continue to cut capex to pay dividends, and investment returns remain low at the current level of oil prices.
The sector’s EBITDA recovery will be slowed by weaker downstream performance in 2016 due to the oversupply of refined products in Europe and North America amid sustained high operating rates.
Moody’s estimates that the sector will generate about $65 billion in negative free cash flow in 2016-17, although several companies including are expected to generate positive free cash flow next year. Moody’s also expects to see integrated companies continue to fund deficits through assets sales, new debt issuances and cash balances over the next 12-18 months.
Source: Moody’sPrevious Next