Fitch: Producers to see strong cash flows in 2011

North American oil and gas producers can expect another year of “robust” cash flows supported by strong oil prices, stable though depressed gas prices, and modestly improving economic conditions, according to Fitch Ratings.

By OGJ editors
HOUSTON, Dec. 21 –
North American oil and gas producers can expect another year of “robust” cash flows supported by strong oil prices, stable though depressed gas prices, and modestly improving economic conditions, according to Fitch Ratings.

The discount of the gas price to the energy-equivalent price of oil will continue, the crediting-rating service said in an annual outlook.

“Few indicators point to a resurgence in natural gas pricing, which would likely require a sustained improvement in demand combined with an industry-wide reduction in natural gas-focused drilling,” the firm said. “While Fitch would anticipate drilling to maintain leases will begin to slow in 2011, current natural gas rig counts far exceed the level required to only maintain existing supply levels.”

Other Fitch expectations for 2011:
• High merger and acquisition activity.
• Strong liquidity for companies focused on oil.
• The possible need for small gas-focused producers to redetermine their borrowing bases.
• Rising costs.
• Regulatory uncertainty related to the Gulf of Mexico and to shale drilling.
• Increased share repurchases and dividends for integrated and large producers.

Price assumptions
Fitch’s base price assumptions for 2011 are $75/bbl for West Texas Intermediate crude and $4/Mcf for Henry Hub gas. Its 2012 price projections are $65/bbl for oil and $4.50/Mcf for gas. Its long-term price assumptions are $60/bbl and $5.50/Mcf.

The firm said it raised its oil price assumption modestly to reflect concerns about inflation after the recent monetary easing by the US Federal Reserve. Strong demand in China and India also is supporting the crude price.

Fitch lowered its gas price outlook because of concerns about oversupply and cost-structure improvements related to efficiency gains in most new US shale plays.

A threat to creditworthiness of the US producing industry—not part of Fitch’s base-case outlook—is a “significant double-dip recession” and consequent reduction in oil demand by China and India.

“A second risk for North American upstream companies would be the possibility of a sharp decline in crude oil prices based on reduced inflationary expectations,” Fitch said.

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