Moody's assigns positive outlook for oil & gas sector
London, April 5, 2011
Moody's has changed to positive from stable its outlook on the global integrated oil and gas sector, based on the continuing strength in the financial performance of oil companies.
In its new Industry Outlook update for the integrated sector, Moody's says that the improvements in financial performance are likely to be underpinned by elevated oil prices and a gradual improvement in operating conditions, which will benefit downstream activities. The new report expresses its view of the fundamental credit conditions in the industry during the next 12 to 18 months.
Moody's also changed its price assumptions for both crude and natural gas for 2011 and 2012, based on changing fundamental conditions that have emerged over recent months.
In recent months, oil prices received a significant boost from fundamental factors, including economic growth and limited increases in Opec supplies. In addition, the spread of political tensions across the Middle East and North Africa (Mena) has pushed up the price of crude oil, as markets began incorporating a higher political-risk premium. In Moody's view this premium is likely to persist, at least for the short term.
Although the ongoing unrest in parts of Mena is creating considerable uncertainty in the market with regards to oil supply, Moody's expects the loss of hydrocarbon production for oil and gas companies operating in the region to be more than offset by the surge in oil prices stemming from concerns over supply disruptions.
Despite the continuing challenging conditions, near-term downstream results should be supported by (i) strengthening demand for oil products (largely spurred by non-OECD consumption growth); and, more specifically (ii) the recent improvement in upgrading margins and widening in light/heavy oil differentials that benefit the more complex refineries.
Moody's believes that integrated oil companies are likely to maintain high levels of investment to bring complex and expensive resources to production. This, combined with sustained dividend pay-outs, is likely to absorb a large chunk of internally generated cash flows, despite the currently inflated price conditions.
The outlook could revert to stable if a further surge in oil prices threatens the global economic recovery and leads to substantial demand destruction, triggering a severe price correction.
Meanwhile, Moody's also raised its price assumption for oil but lowered its assumption for natural gas for 2011 and 2012. The benchmark WTI crude assumption is now $90/bbl for 2011 (up from $80/bbl), $85/bbl for 2012, and $80/bbl beyond 2012. For Brent crude, Moody's has a new assumptionof $100/bbl for 2011, but no set assumptions yet beyond this year.
For natural gas, Moody's assumes a lower baseline price of $4.00/MMBtu for 2011, $4.50/MMBtu for 2012, and $5.00/MMBtu for 2013 and beyond.
The new assumptions are not forecasts, but baseline approximations that help the agency evaluate credit risk, it said.-TradeArabia News Service