Moody’s: Lower price assumptions hurt industry outlook

Near-term prospects for oil and gas producers are deteriorating along with expectations for prices of crude oil and natural gas.

Near-term prospects for oil and gas producers are deteriorating along with expectations for prices of crude oil and natural gas.

Moody’s Investors Service warned of more trouble for the upstream industry as it slashed its assumptions about oil, gas, and NGL prices for 2016 and 2017.

“We do not expect oil prices to shift significantly in 2016 from their late-2015 levels, which have touched multiyear lows in December,” the ratings firm said in a Dec. 15 “sector comment.” Moody’s projected average prices of West Texas Intermediate crude at $40/bbl in 2016, $45/bbl in 2017, and $50/bbl in 2018. The 2016 price is down $8/bbl from the firm’s earlier forecast.

In the medium term beyond 2018, Moody’s expects the WTI price to be $60/bbl.

For Brent crude, Moody’s lowered its forecast for 2016 to $43/bbl from $53/bbl. The average Brent price, it now projects, will be $48/bbl in 2017, $53/bbl in 2018, and $63/bbl in the medium term.

Members of the Organization of Petroleum Exporting Countries “continue to produce without restraint as they compete for market share, exacerbating the currently saturated markets,” said Terry Marshall, senior vice-president. “Russia has also greatly increased production, and the possibility that sanctions will be lifted on Iran in 2016 could flood the market with even more supply.”

With inventories high and growing, an expected 1.3 million b/d increase in global oil demand won’t rescue the market.

“Increasing consumption will not match the increase in supply,” Marshall said.

Moody’s doesn’t expect global oil production to fall before the second half of 2016 at the earliest.

For Henry Hub natural gas, Moody’s trimmed its price expectations by 50¢/MMbtu to $2.25/MMbtu in 2016, $2.50/MMbtu in 2017, and $2.75/MMbtu in 2018. The firm’s medium-term gas-price projection is $3/MMbtu.

Its new projections for NGLs are $12/boe in 2016, $13.50/boe in 2017, $15/boe in 2018, and $18/boe in the medium term.

Upstream hit hardest

As always, commodity-price slumps hit the upstream and oil field services industries hardest, Moody’s notes.

“Low commodities prices and uncertainty about the pace of their recovery will continue to limit exploration and production activity in 2016, leading to spending cuts, stalled production growth, and volume declines,” said Steve Wood, managing director of the Moody’s oil and gas team. “These cuts will in turn lead to lower revenue for drilling and oil field services companies, which will face persistent equipment overcapacity and need to minimize capital expenditures just to operate near break-even cost levels.”

Downstream strength will partly offset a continuation of negative free cash flow through 2016 for integrated oil companies, which Moody’s said will have to cut capital spending again after a 20% pullback in 2015.

Growth in refining and marketing will flatten, the firm said, while midstream growth slows.

“North American refiners have a structural advantage and will benefit from better profit margins from turning crude oil into refined petroleum products,” Wood said. “Although midstream will face growing headwinds in 2016 as lower E&P spending makes its way downstream, its investment in energy infrastructure will help stabilize the sector.”

By investment sector, Moody’s expects earnings before interest, tax, depreciation, and amortization in 2016 to recover modestly for integrated oil and gas, decline 20-25% for exploration and production, decline by at least 20% for drilling and oil field services, and flatten for midstream and master limited partnerships and for refining and marketing.

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