The steep drop in oil prices since the middle of this year has led Moody's Investors Service to lower its pricing assumptions for the two benchmark crude oils, European Brent and West Texas Intermediate (WTI), by $10 in 2015 and $5 in 2016, the rating agency said. Moody's also changed its outlook for the global independent exploration and production sector to negative from positive, for the global oilfield services and drilling sector to negative from stable, and for the global integrated oil and gas sector to stable from positive.
Moody's revised its assumptions for average spot prices for Brent crude (a proxy for the world market) to $80 per barrel for 2015 and to $85 per barrel in 2016, and for WTI crude (a proxy for North American production) to $75 per barrel in 2015 and $80 per barrel in 2016 and thereafter. The 2015 price assumption for natural gas liquids, which tend to move in line with oil prices, has also been lowered, by $2 to $28 per barrel of oil equivalent in 2015, but remains unchanged at $30 for 2016. The pricing assumptions represent the baseline approximations the rating agency uses to evaluate risk in the oil and natural gas industry.
"Global demand has not kept pace with strong oil production worldwide, leading to the recent drop in oil prices and to our revised price assumptions," says Managing Director, Steve Wood. "We expect that rising demand for crude will put a floor beneath crude prices in 2015 and beyond, limiting further price drops and pointing to a gradual correction. Meanwhile, strong natural gas liquids supplies in North America led us to trim our 2015 assumptions for these commodities."
The negative outlook for independent exploration and production companies reflects the impact of lower oil prices on cash flow over the next year or so. If oil prices stay at around $75 through 2015, most of the lost revenue will fall to companies' bottom line and reduce the amount of cash available for reinvestment. Absent an extraordinary event, the supply-demand equation isn't likely to change.
"We expect exploration and production companies to reduce capital spending by around 20% and possibly more next year, depending on how long oil prices remain low," Wood says. "Contrary to the aggressive capital spending seen in the sector over the past three years, companies will be less willing to spend in the current weak price environment."
Moody's negative outlook for the global oilfield services and drilling sector reflects declining oil and gas company capital expenditure over the next 12 to 18 months, as well as the pressure exerted on oilfield services companies by upstream companies when oil prices fall.
"The roughly 25% drop in oil prices since June has exacerbated existing weakness in offshore markets and will strain the margins of onshore service providers," Wood says. "Oil price changes typically affect oilfield services companies more dramatically than oil and gas companies, given the former's almost complete reliance on oil and gas firms and consequent weak negotiating position." Moody's expects oilfield services and drilling sector EBITDA to decline by 12%-17% in 2015.
The change in outlook, to stable, for the global integrated oil and gas sector reflects Moody's view that aggregate EBITDA will be essentially flat in 2015, down from its earlier expectation of 5% growth or more in 2015. Lower demand for oil in major consuming economies and the steep drop in oil prices since September could be sustained in 2015, cutting into cash flow growth. The agency doesn't foresee large cuts in capital budgets, but exploration spending and other investments in the early stages will come under closer scrutiny. Still, major new upstream projects, coupled with modestly improving refining conditions, will support industry cash flows despite the upstream price pressures.
The outlooks for the midstream and refining and marketing sectors remain unchanged.
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