Moody’s sees integrated oil majors faring better on lower prices

KUALA LUMPUR: Moody's Investors Service expects integrated oil majors to fare better as the global oil and gas industry enters a challenging 2015 based on stubbornly low oil prices.

It said on Tuesday the integrated oil companies have been more measured in their response to falling oil prices, typically making investment decisions assuming prices
of no more than US$50 to US$60 a barrel, since projects can take years to complete.

“That said, ExxonMobil, Royal Dutch Shell and Total have announced spending reductions for 2015, while cuts at others, including Chevron and BP, look likely," it pointed out.

At midday on Tuesday, oil prices edged up, steadying after a 5% plunge in the previous session that saw prices touch fresh 5-1/2-year lows in an oversupplied market.

Brent crude gained 16 cents and was at US$53.27 a barrel, after dropping to a low of US$52.66 on Monday, its lowest since May 2009. US crude was up 13 cents at US$50.17 after slipping below US$50 for the first time since April 2009.

Reuters said worries about surplus oil supplies were fuelled by data showing output in Russia hit a post-Soviet-era high in 2014 and exports from OPEC's second largest producer, Iraq, were the highest since 1980. Jitters over political uncertainty in Greece drove investors out of risk assets globally to safe-haven bonds.

Moody’s said among the players, exploration and production (E&P) companies would be hit first, while oilfield services (OFS) and midstream energy operators would feel the knock-on effects of reduced capital spending in the E&P sector. 

“Offshore contract drillers are likely to have their toughest year since 2009, and integrated oil majors are the best positioned to react to lower prices,” it said.

Moody’s said the drop in crude oil prices to around US$55 a barrel from about US$95 a barrel in July 2014 reflected a number of factors, including growing supply from non-OPEC countries, particularly the US; a slowing increase in global demand; and Saudi Arabia's decision not to continue acting as OPEC's (and the world's) swing producer.

"If oil prices remain at around US$55 a barrel through 2015, most of the lost revenue will hit the E&P companies' bottom line, which will reduce cash flow available for re-investment," said managing director -- corporate finance, Steven Wood. 

"As spending in the E&P sector diminishes, oilfield services companies and midstream operators will begin to feel the stress."

Wood pointed out if oil prices average US$75 a barrel in 2015, North American E&P companies would likely reduce their capital spending by around 20% from 2014 levels, while if they go below $60 a barrel spending could be cut by 30%
to 40%.

Outside North America, E&P firms would likely reduce spending by 10% to 20%, depending on prices.

OFS sector earnings would fall by 12%-17% if oil averages US$75 a barrel, while an average price below US$60 a barrel could drive earnings down by

Although the world's largest OFS companies -- Schlumberger, Halliburton and Baker Hughes -- are all sufficiently strong to weather a sustained drop in oilfield activity, smaller companies such as Basic Energy Services and Key Energy Services would come under greater stress.

Slumping oil prices amid a surplus of new rig deliveries spell difficult times ahead for offshore contract drillers. Low oil prices will put intense pressure on dayrates in 2015, but for the many companies that will have to renew contracts on existing rigs at significantly lower rates, 2016 could prove even more painful.

In the midstream sector, a spending cut of 25% or more would make it difficult for operators to maintain EBITDA growth at current levels of 12%-15%. And early in the capital budgeting season a number of E&P companies had already signaled spending cuts of 25% or greater.

The new report also discusses the impact of lower oil prices on China, Mexico and Russia. 

China is the world's largest net importer of crude and will benefit from the drop in oil prices. Mexico's development as a result of energy reform will be delayed. Russia's lower oil export duties help its oil companies, but add to an already oversupplied market.

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