Weakening crude oil prices will cut exploration and production spending by independent producers in the US next year and make integrated oil and gas companies wary of upstream projects dependent on a price of $80/bbl, according to Moody’s Investors Service.
The company, which analyzes credit conditions in the industry, lowered its price assumptions for Brent crude to $80/bbl through 2015 and $85/bbl in 2016 and for West Texas Intermediate crude to $75/bbl in 2015 and $80/bbl in 2016.
The projections represent cuts from earlier assumptions for both crudes of $10/bbl next year and $5/bbl in 2016.
Moody’s left unchanged its assumptions for the Henry Hub spot price for natural gas of $3.75/MMbtu in 2015 and $4/MMbtu in 2016.
The firm lowered its assumption for the 2015 NGL price to $28/boe from $30/boe and left the 2016 assumption at $30/boe.
Spending to decline
With falling crude prices trimming cash flows, independent producers will cut capital investment in 2015 by 20% from 2014 levels, Moody’s predicted.
Responding to the spending retreat, production growth will drop from 2013-14 rates to about 10% in 2015 as operators turn away from high-risk drilling and drilling outside sweet spots in unconventional resource plays.
Helping to offset the effects of lower crude prices will be a decline of about 10% in per-barrel operating costs. An expected drilling slowdown will strengthen producers’ bargaining power with service providers, and fuel and energy costs will decline, Moody’s explained.
The balance of lower crude prices and operating costs and higher production rates will be a 10-15% decline in earnings before interest, taxes, depreciation, and amortization (EBITDA), the firm said while lowering its rating for the independent E&P industry to negative from positive.
For the global integrated oil and gas industry, Moody’s projected 2015 EBITDA unchanged from the 2014 level and changed its rating to stable from positive.
As large upstream projects reach completion, a trend of negative free cash flows and rising debt among integrated companies will moderate from 2015 through late 2016, the firm said. Many companies already were emphasizing capital efficiency, cost reductions, and shareholder rewards and were retreating from long-cycle investments.
Although lower oil prices won’t make integrated companies, with their characteristically long-term views and conservative price assumptions, slash spending, “exploration budgets, projects that become more marginal in an $80[/bbl] oil price environment, and other investments in early stages will come under closer scrutiny, which is likely to lead to some further spending cuts.”
Production will grow in 2015-16 for most integrated companies as large projects come on stream.
Lower crude prices will improve downstream results “modestly,” Moody said, offsetting a global demand slowdown and rising capacity. US refiners are benefiting from discounted crudes and low energy costs. European refining will remain under pressure from the global demand and capacity trends.
The price slide
Moody’s attributed the slump in oil prices since mid-2014 to the failure of global demand to keep up with strong production growth, especially in the US and Libya.
Saudi Arabia, the firm pointed out, has cut prices will holding its production steady, “thereby oversupplying the market and dampening prices for other oil producers.”
Rising demand will “put a floor beneath crude prices in 2015 and beyond, limiting further price drops and pointing to a gradual correction,” Moody’s said. But further price weakening would result from continuation of the decline in China’s growth, a lifting of sanctions enabling Iranian production to rebound, and a lack of production discipline among members of the Organization of Petroleum Exporting Countries.
“In the longer term, global oil demand will rise as economic growth gradually improves in Europe, China, and other markets, implying a moderate rebound for the low oil prices that we see persisting into 2015,” Moody’s said.