Moody’s sees improved outlook for E&P sector earnings

Rating agency Moody’s says the outlook for the global oil and gas exploration and production (E&P) sector has been changed from negative to stable, with earnings set to recover slowly into 2021.

Moody’s said industry earnings are expected to slowly rise over the next 12 to 18 months on the back of slightly higher oil prices, while natural gas producers will continue to benefit from the reduced supply.

“We expect E&P sector earnings before interest, tax, depreciation and amortisation (EBITDA) to rise by about 5 percent between mid-2020 and mid-2021 as oil prices stabilise around US$40 per barrel.

“Factors including lower operating costs and oilfield services expenses, modest hedge protection, and easier access to midstream infrastructure will partially support margins through at least the middle of next year,” Sajjad Alam, a Moody’s VP-Senior Analyst, said.

According to Alam, E&P firms have slashed capital spending much more quickly in 2020 than they did during the 2015-16 downturn.

The rating agency said spending is down 40-50 percent this year, and absent higher oil prices, spending will continue at these low levels in 2021.

It said lower spending will lead to flat volume growth in 2021. Firms that suspended dividends and share buybacks in 2020 will likely use any excess cash flow to maximise shareholder returns or pay down debt, before increasing capital spending.

Meanwhile, Moody’s said constrained access to capital and looming debt maturities will remain the biggest hurdles for speculative-grade companies with high debt loads, limited hedging and tight liquidity.

“Default risk will remain high for weaker companies through 2021, with oil prices at US$45 per barrel or higher needed to sufficiently reduce elevated solvency risk,” it said.

Oil prices have risen and stabilised around US$40/barrel (bbl) since July 2020, after averaging US$30/bbl during the second quarter of 2020.

Moody’s said its base case oil price assumption is an average price of US$40/bbl in 2021 for West Texas Intermediate (WTI), the North American benchmark crude, rising towards a US$45-65/bbl medium-term price band after that.

Benchmark Brent crude prices are expected to have a US$5 average premium over WTI prices through 2021.

“We expect natural gas prices to remain range-bound between US$2-US$3/MMBtu through 2021, despite a strong rally in mid-2020. Low oil prices will also hold prices for natural gas liquids well below 2019 levels, averaging about 35 percent of crude prices through 2021,” Moody’s said.