KUALA LUMPUR: Moody's Investors Service has changed its outlook for the global exploration and production (E&P) sector to stable from negative, with earnings set to recover slowly into 2021.
It said in a statement on Friday that earnings before interest, tax, depreciation and amortisation (Ebitda) will rise by about 5% for E&P companies between mid-2020 and mid-2021 as oil prices post a modest increase.
North American natural gas producers will continue to benefit from the swoon in oil prices, which restrained the production of associated gas, so accelerating oil production would increase their risks.
“Global demand for transportation fuel will remain below five-year average levels beyond 2021, barring speedier resolutions to Covid-19 and trade tensions among producing countries, ” it said.
Moody's said producers slashed capital spending much more quickly in 2020 than in the 2015-16 downturn.
E&P spending is tracking a 40%-50% decline in 2020, and will continue at a low level in 2021 without higher prices. Companies will use excess cash flow to pay down debt and maximise shareholder returns before increasing capital spending.
The rating agency said various factors will support E&P margins at least through mid-2021 as the industry continues to operate below capacity.
E&P companies will have lower operating costs and oilfield services (OFS) expenses, along with modest hedge protection, and easier access to midstream infrastructure. The broad based reduction and suspension of dividends and share buybacks will also help companies preserve cash flow.
“We expect M&A to gain steam through 2021, with stronger companies leading the charge. However, companies will look for compelling strategic rationales before engaging in major M&A deals, instead prioritising debt reduction, dividend increases, share repurchases or growth spending that they had paused in early 2020.
“Looming debt maturities and limited access to capital will remain the biggest hurdle for speculative-grade E&P companies that have high leverage, limited hedging, and tight liquidity.
“Default risk will remain high for weaker companies through 2021 and we believe $45/bbl or higher oil price is needed to sufficiently reduce the elevated solvency risk, ” Moody's said.