Global oil and gas prices will remain weak in 2016 on continued oversupply that will result in at least 20-25 per cent reduction in capital spending in upstream oil and gas exploration and production, Moody’s Investors Service said today.
In its report ‘Oil and Natural Gas Industry Global: Persistent Weak Prices in 2016 Rein in Capital Spending, Heighten Financing Risk’, it said oversupply will continue to hold down oil and gas prices in 2016.
“OPEC and many non-OPEC oil producers continue to produce without restraint as they battle for market share. Increased production has vastly exceeded growth in oil consumption, including from major consumers like China, India and the US,” it said.
The potential lifting of sanctions on Iran could add significant supply to the market in 2016, offsetting or even exceeding expected declines in US production.
“The oil and gas sector will see a rise in distressed exchanges and defaults amid the continued low commodity prices that we expect in 2016,” Moody’s said.
Moody’s forecast widely traded Brent crude oil to average USD 43 per barrel in 2016 before rising to USD 48 in next year and USD 53 in 2018.
Low oil and natural gas prices have already directly affected cash flows of exploration and production (E&P) companies, while also significantly weakening other energy companies such as drillers and oilfield service providers due to reduced drilling and completion activity.
“We expect M&A and industry consolidation to increase across the oil and gas industry in 2016, but to remain fairly subdued, since the timing of a commodity price recovery remains uncertain,” it said.
Industry stress will force many companies to sell assets to improve liquidity and financial leverage, and increased bankruptcy filings will facilitate more attractive asset valuations.
There would be ample energy asset-purchase opportunities in 2016, but weak commodity prices present a challenge for potential upstream buyers.
“We foresee capital spending reductions of at least 20-25 per cent in 2016 across the E&P industry, and the oilfield services and drilling (OFS) industry will remain the most stressed energy segment,” Moody’s said.
Lower capital spending will lead to further capital budget cuts for integrated and national oil companies (NOCs), but OFS companies in particular will emphasize cost reduction in response to reduced demand.
“The integrated oil and gas companies will experience stressed cash flow metrics in 2016-17,” it said. “Lower oil and natural gas prices will keep the IOCs’ earnings flat or lower in 2016, aggravating the industry’s negative free cash flow, which we estimate at about USD 60 billion for 2016, and heightening its funding needs.”