Complex Made Simple

E&P looks positive even though oil market remains volatile

The outlook for the global independent oil and gas exploration and production (E&P) sector remains positive, Moody’s Investors Service says in a new report.

The credit rating agency has also said that the sector’s EBITDA (earnings before interest, taxes, depreciation and amortization) is likely to grow at a healthy pace over the next 12 to 18 months amid increased oil and natural gas production, higher commodity prices and moderate cost increases.

“We expect the global E&P sector EBITDA to grow by 20 per cent-30 per cent in 2017, following declines of about 25 per cent in 2016 on top of a roughly 45 per cent drop in 2015,” said Moody’s Vice President Amol Joshi in the agency’s new report, “Independent Exploration and Production — Global: Producers Continue to Recover as Commodity Prices Stabilize.”

Rising capital spending

“In addition to prices recovering from trough levels, the independent E&P sector’s oil and natural gas production will go up about 5 per cent on average as a result of increased capital spending and drilling efficiencies, even as deep spending cuts over the last two years have been a significant drag.”

Moddy’s predicts that global capital spending will rise by 25 per cent to 30 per cent over the next year or so.

“When commodity prices slumped, production and cash flows fell, while capital markets became increasingly difficult to access, forcing companies to preserve their liquidity by cutting spending. Higher prices have brought relief, with sector liquidity expected to improve considerably this year, and with the capital markets and banks both open especially to firms with good assets or showing production and reserve growth,” it said in the new annual outlook.

Further cost reduction?

Following relentless cost-cutting over the past two years, capital costs will inflate by roughly ten per cent in 2017, with completion costs rising up to 30 per cent in certain basins, Moody’s says.

The improving supply/demand balance in the oilfield services and drilling sector has reduced much of the E&P sector’s bargaining power onshore, but demand for offshore oilfield services and drilling will remain weak.

E&P companies can seek further cost reductions by restricting drilling to prolific acreage and through tighter supply-chain management, as well as mergers and acquisitions.

M&A to go up

Mergers and acquisitions (M&A) will be robust over the next 12 to 18 months as oil and natural gas prices remain range-bound and financing for deals again becomes available, Moody’s says.

In its opinion, an active M&A market bodes well for the E&P sector, with asset sales improving liquidity or reducing debt for capital-intensive companies with high leverage, while giving others opportunities to buy high-quality assets at relatively low prices.