Reporting news to the oil and gas industry about the oil and gas industry is a serious business. It has to be. Seriousness is a tone that readers of Oil & Gas Journal have come to expect.
Reporting news to the oil and gas industry about the oil and gas industry in the midst of a commodity price environment like the current one, however, takes seriousness to a whole other level.
This week's issue contains OGJ's annual Capital Spending Outlook, starting on p. 28, in which Editor Bob Tippee and Senior Editor-Economics Conglin Xu compile numerous analysts' reports to provide OGJ's unique forecast on capital spending, largely for exploration and production companies, but also for midstream, downstream, and integrated firms. As one would expect, that outlook is a rather dim one: E&P budgets have been cut because of diminished cash flow due to lower oil and gas prices. Of course, industry will-as it always does-recover, but that recovery will be slow-and painful-to a great many. Among those likely to be the hardest hit are oil field service and supply companies.
Pressure on services
As E&P firms continue to cut spending, they will seek rate cuts for oil field services (OFS). Moody's Investor Service analysts Sajjad Alam, Terry Marshall, and Steven Wood, in a Mar. 31 OFS industry outlook, explain that their negative outlook for the global OFS industry over the next 12-18 months "reflects the steep decline in upstream E&P spending" expected in 2015. "Oil prices will remain weak and volatile in 2015," they say, "and aggregate global E&P capital spending will be down about 25% from 2014 levels."
The analysts speculate that if Brent crude prices average $55/bbl this year, OFS industry earnings will drop by 25-30%, and if Brent prices fall below $45/bbl, earnings could shrink by more than 35%.
The Moody's analysts say they will be watching for a "sustainable recovery in oil prices" to stabilize their outlook. "No OFS segment will be immune to upstream spending reductions," they warn, "but the strain will vary by subsector and geography."
Specifically, they say, OFS companies that will endure the least amount of damage to their profiles will be those that are "diversified across products and geographies, own high-quality assets, have some term contract protection or revenue backlog, or serve financially strong oil companies."
Other forecasts
The Moody's analysts also forecast that the offshore drilling markets will "continue to deteriorate as rig availability soars and upstream demand weakens." Coming under intense pressure, they say, will be dayrates and utilization and they expect "more rig stacking, asset write-downs, delayed rig deliveries, and contract modifications and terminations."
Land rig counts also will drop sharply in early 2015, they say, "particularly in high-cost US basins." The analysts noted that the US rig count "dropped 46% from November 2014-March 2015, faster than in past downcycles."
They noted, "E&P companies are releasing rigs early, unwilling to make long-term commitments and seeking significant rate reductions, particularly in North American shale plays."
Overall, they said, OFS companies "will focus on minimizing operating and capital costs, providing cost-efficient solutions to customers, and maintaining sufficient liquidity through mid-2016."
Those firms that can best manage these tasks "have the strongest prospect of maintaining their credit quality through this period of weak oil prices."
The analysts said they believe that global oil production will continue to rise this year, and that "swelling oil inventories will restrain prices despite a sharp contraction in the US land rig count and reduced upstream spending." They said, "Supply will continue to outpace demand, keeping OFS markets weak at least through mid-2016."
The best advice the analysts provide OFS companies for weathering this latest downturn is to maintain adequate liquidity and avoid debt covenant compliance issues, especially those who are highly leveraged. "Those that quickly address their projected funding shortfalls, debt maturities, and declining covenant cushions will more easily survive this downturn," they advise.