The Oil and Gas Sector Could Stabilize with Crude Price Increase, Lean Operating Strategy

As oil breached the $50-per-barrel mark today for the first time since August following an OPEC deal last week, Moody’s Investors Service sees stable earnings in the oil and gas sector over the next year-and-a-half thanks in part to higher oil prices and lower operating costs.

"Over the last year, integrated oil and gas companies have accelerated reductions in their operating costs to adjust to earlier oil price declines,” said Elena Nadtotchi, a Moody's vice president, senior credit officer and author of a recent report on the topic. “As a result, most companies' upstream operations returned to positive net income generation in the second quarter of 2016, while also benefiting from an uptick in the price of crude."

Still, Moody’s analysts expect slower upstream cost reductions going forward after the industry realized a 26% cut in average production costs per barrel of oil equivalent in 2015. “Volume growth in the sector will remain flat as companies continue to cut capex to pay dividends, and investment returns remain low at the current level of oil prices,” Nadtotchi said.

Also, the oversupply of refined products in Europe and North America leading to weaker downstream performance in 2016 likely will slow the sector’s earnings before interest, taxes, depreciation and amortization. Moody’s predicts the sector should generate roughly $65 billion in negative free cash flow this year and next, though some firms should create positive free cash flow. The ratings agency also anticipates integrated companies will continue to fund deficits by selling off assets, issuing new debt and cash balances over the next year-and-a-half.

- Nicholas Stern, editorial associate

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