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Moody's sees cost cuts, price rise boosting E&P side of big global energy firms

Thecombination of slightly higher commodity prices and ongoing cost reduction willhelp the upstream segments of major integrated oil and gas companies reboundover the next 12 months, Moody's analysts said.

EBITDAfor the global integrated oil and gas sector is stabilizing and is expected to"modestly improve" over the next year, the analysts wrote in an Oct.3 report. "Although EBITDA for the sector … is likely todecline by around 5%-10% in 2016, following a roughly 40% drop in 2015, weexpect higher oil prices and lower operating costs to lead to a steadyimprovement in the companies' dominant upstream divisions over the next 12months," the firm said. "The integrated companies have substantiallyrealigned their cost structures to the lower oil price environment and havemostly reported a return to positive net income generation in their upstreamoperations in the second quarter of 2016."

Moody'swent on to say it expects the sector's aggregate EBITDA to recover to 2015levels within the next year. Correspondingly, production cuts are likely toslow into 2017. "Further reductions achieved are likely to bemore modest than in 2015 when companies cut upstream production costs by anaverage of about 26% per barrel of oil equivalent," Moody's said.

Theanalysis firm said it does not expect a rebound in CapEx, predicting anaggregate 20% drop in 2016 and between 10% and 15% in 2017.

"Weproject that the sector's cash flow will still remain too low to funddividends," the analysts wrote. "This view is based on our oil priceestimates of $40 per barrel (bbl) in 2016 and $45/bbl in 2017 and assumes thereis no change in current dividend policies."

Moody'sVice President Elena Nadtotchi, one of the report's authors, said many oil andgas producers have already started to dig their way out of the red.

"Overthe last year, integrated oil and gas companies have accelerated reductions intheir operating costs to adjust to earlier oil price declines. As a result,most companies' upstream operations returned to positive net income generationin the second quarter of 2016, while also benefiting from an uptick in theprice of crude," she said in a statement.