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Oil at $50: what it means for offshore companies

Earnings for offshore oilfield services and drilling (OFS) companies will continue shrinking through 2018, says credit rating agency Moody’s.

This will be more certain in case of those focused on deepwater and ultra-deepwater activities as significant overcapacity precludes OFS companies from negotiating prices much higher than today’s depressed levels, the agency stated.

Moreover, sustainable price recovery for acutely oversupplied sub-segments, such as offshore contract drilling and vessel-based support, will likely be several years away, according to analysts at Moody’s.

Underscoring the challenge, Moody’s Analyst Sajjad Alam cautioned that without consolidation or sharp capacity reductions, these same segments will have a hard time turning the corner.

Rating hike

On the likelihood of Moody’s upgrading exploration and production (E&P) companies with oil prices in a $40 to $60 per barrel range (bbl), Steve Wood, Managing Director for Moody’s Oil & Gas team, said it will take “more positive rating actions for those E&P issuers with durable cost structures and records of profitable reinvestment if oil prices sustainably reach the mid-$50s.”

“Given recent robust production numbers, however, it appears unlikely that oil prices will go much higher than that for the foreseeable future,” Wood added.

Cuts vs higher production

Moody’s says that while global oil prices have gained some support from OPEC production cuts, the prospect of higher production in the US and non-OPEC countries has also kept them from approaching $60 per bbl.

Nevertheless, the ratings agency has upgraded a number of E&P companies in recent months, including Pioneer Natural Resources (Baa2 stable) and Devon Energy (Ba1 stable), based on debt reduction and their improving credit metrics.

Single-basin exposure

When asked about how Moody’s evaluates a company’s single-basin exposure and concentration risk, Amol Joshi, a Moody’s Vice President – Senior Analyst, said that the agency analyzes company reserves and production characteristics in terms of basin exposure and related takeaway capacity, as well as differentials and costs. A company’s asset portfolio durability is a key focus for the ratings agency.

Moody’s notes that larger E&P companies tend to operate in a greater range of geographic areas and geologic basins, giving them some protection from basin-specific shocks. Even so, analysts emphasize that the risks of exposure to a single-basin also depend to an extent on the basin in question.

An E&P company that focuses entirely on an especially prolific single basin, such as Pioneer in the Permian or EQT (Baa3 stable) in the Marcellus, might overcome some of the typical single-basin disadvantages, according to the ratings agency.