Moody’s: Outlook remains positive for global E&P firms

May 16, 2017
The outlook for global independent exploration and production firms remains positive, according to a recent report from Moody’s Investors Service entitled, “Independent Exploration & Production—Global: Producers Continue to Recover as Commodity Prices Stabilize.”

The outlook for global independent exploration and production firms remains positive, according to a recent report from Moody’s Investors Service entitled, “Independent Exploration & Production—Global: Producers Continue to Recover as Commodity Prices Stabilize.”

Increased oil and natural gas production, higher commodity prices, and moderate cost increases will help the independent business’ earnings grow at a healthy pace over the next 12-18 months, Moody’s said in the report.

“We expect the global E&P sector EBITDA to grow by 20-30% in 2017, following declines of about 25% in 2016 on top of a roughly 45% drop in 2015,” said Moody's Vice-Pres. Amol Joshi. “In addition to prices recovering from trough levels, the independent E&P sector’s oil and natural gas production will go up about 5% on average as a result of increased capital spending and drilling efficiencies, even as deep spending cuts over the last 2 years have been a significant drag.”

Capital spending will rise by 25-30% across the E&P sector in 2017, Moody’s said. Capital access is critical to the health of the capital-intensive E&P sector, whose production fell in 2015-16 after capital markets access diminished, forcing companies to preserve liquidity by cutting capital spending. In 2017, higher oil and natural gas prices have revived capital spending at least onshore. E&P liquidity will improve significantly in 2017 amid good access to capital markets and stable or higher bank borrowing for companies showing production and reserve growth.

Following relentless cost-cutting over the past 2 years, capital costs will inflate by about 10% in 2017, with completion costs rising up to 30% in certain basins, Moody’s said.

“Today’s improving supply-demand balance in the oil field services and drilling sector has reduced much of the E&P sector’s bargaining power onshore, though offshore oil field services and drilling demand will remain weak. E&P companies can seek further cost reductions through supply-chain management, restricting drilling to prolific acreage, and industry consolidation.”

However, overall debt in the E&P sector will remain high in 2017-18 despite stronger cash flow and liquidity amid EBITDA growth, asset sales and equity issuances, Moody’s said. Companies increased debt balances in 2010-14, when they significantly outspent cash flow and grew production while oil and natural gas prices remained high, funding deficits with debt. E&P debt-related credit metrics continue to improve as EBITDA increases, but remain well below their pre-2015 levels.

Mergers and acquisitions will be robust over the next 12-18 months as oil and natural gas prices hold relatively steady and financing again becomes available for deals, Moody’s said. An active M&A market bodes well for the E&P sector, with asset sales improving liquidity or reducing debt for capital-intensive companies with high leverage, while giving others opportunities to buy high-quality assets at relatively low prices.