MOODY’S Investors Service has upgraded its outlook for the global exploration & production (E&P) sector from negative to stable.
In a report published today, it said the industry earnings would slowly rise over the next 12 to 18 months on the back of slightly higher oil prices, while natural gas producers would continue to benefit from the reduced supply.
“We expect E&P sector’s earnings before interest, tax, depreciation and amortisation (EBITDA) to rise by about 5% between mid-2020 and mid-2021 as oil prices stabilise around US$40 (RM116) per barrel,” said Moody’s vice president-senior analyst Sajjad Alam.
“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,” he added.
According to the report, E&P firms had slashed capital spending much more quickly in 2020 than they did during the 2015-16 downturn.
“Spending is down 40%-50% this year, and absent higher oil prices spending will continue at these low levels in 2021. 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,” said Alam.
Meanwhile, Moody’s also highlighted that constrained access to capital and looming debt maturities would 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 (RM187) per barrel or higher needed to sufficiently reduce elevated solvency risk.
More research and insight on the coronavirus (COVID-19) outbreak, can be obtained from moodys.com/coronavirus. – Sept 11, 2020
