10-12-2016

Moody’s: Global oil and gas industry to see modest rebound in the year ahead

Moody

The global oil and gas industry will continue to struggle under the weight of high debt levels in the coming year, even as the industry rebounds modestly from its 2016 trough, Moody’s Investors Service says in its 2017 outlook. Among the firm’s outlooks for the various energy sectors, two carry stable outlooks, two have negative outlooks, and one outlook is positive.

The outlook is stable for integrated oil and gas companies, Moody’s says. In the coming year, integrated oil & gas EBITDA will rise by about 5%, buoyed by stabilizing capital spending and a substantial re-alignment of cost structures. And while free cash flow is expected to turn positive in 2018 if firms maintain scrip dividends, in the near-term, sustained dividends will create negative free cash flow across the sector which will need to be covered by debt and asset sales.

Exploration and production companies should fare better in 2017; Moody’s outlook for this sector is positive.

“Oil and gas prices are improving from 2016’s lows, and commodity price hedging is increasing,” says Steve Wood, Managing Director for Moody’s oil and gas team. “Combined with reduced drilling and service costs, we expect EBITDA to grow 20% to 30% for exploration and production firms in the coming year.”

Meanwhile, Moody’s negative outlook for drilling and oilfield services companies reflects continued weak upstream spending, which will limit any meaningful recovery for drillers, even as equipment excess continues to weigh on prices for offshore services. Moody’s expects the drilling and oilfield services sector to see EBITDA decline to very low levels through early 2017, before increasing by 4% to 6%.

For midstream and master limited partnerships, or MLPs, Moody’s outlook is stable. Lower E&P spending has extended into midstream, flattening EBITDA growth to less than 5% and making creeping debt levels difficult to address. Despite the uptick in M&A activity, the synergies and cost savings from such transactions are unlikely to increase aggregate EBITDA as much as investments in growth capital spending, even as midstream capital growth in anticipated to drop another 20% from current levels.

The rating agency’s outlook for the refining and marketing sector is likewise negative. Gasoline and distillate inventories remain above their five-year averages, with uneven declines in refinery utilization among US regions. On the demand side, US and China growth are expected to slow, while Europe is expected to decline. As a result, EBITDA will drop by 10% to 15% through the middle of next year in North America and Europe amid weak crack spreads.

Source: Moody’s

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