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Moody's, S&P Global Ratings cautiously optimistic about oil, gas sector for 2018


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Moody's, S&P Global Ratings cautiously optimistic about oil, gas sector for 2018

After years of pessimism and uncertainty in the oil and gas sector, credit rating agencies are looking at 2018 with a sense of cautious optimism.

Recent year-ahead outlooks from Moody's and S&P Global Ratings reflect a growing belief that oil and gas prices have at least stabilized and are more likely to rise than fall. That should be a good news for all parts of the industry.

"Sustained technological improvements, modestly higher E&P capital budgets will help companies increase production, even with spending significantly below peak levels," Moody's said. "As cash flow and asset values increase, companies will increase borrowing bases or access capital markets more easily."

Moody's Managing Director for Oil and Gas Steve Wood sees positive signals coming from the industry, especially in the upstream segment. "Things are, in fact, getting better in the E&P side and that'll drag along the services sector and midstream," he said in an interview. "Prices have somewhat stabilized, and more to the point there's more confidence in the industry."

Price stability has encouraged increased hedging by both oil and gas producers. "We're seeing a lot more hedging," Wood said. "It gives [producers] a little more certainty on cash flow."

Stability has also allowed companies to clean up their balance sheets, which suffered heavily in the downturn from mid-2014 to 2016.

"Clearly, the number of [rating] downgrades has stabilized owing largely to generally stable hydrocarbon prices and effort by oil and gas companies to reduce costs, improve productivity, and de-lever the balance sheet where appropriate," S&P Global Ratings said in a 2018 outlook. "Credit ratios for the sector largely improved along with the rebound in the oil prices and the significant decrease in industry costs and productivity gains garnered by producers."

S&P Global Ratings anticipated prices for both West Texas Intermediate and Brent Crude to remain in the $50 per barrel to $55/bbl range in 2018, with gas prices in the area of $3/Mcf. That should be enough to increase U.S. production and capital spending.

"We expect onshore spending in the U.S. to increase 15% next year reflecting mostly stable price deck of $50-$55 per barrel," the rating agency said.

Good news for producers should mean good news for the oilfield services sector, which suffered most during the price downturn. Moody's said major services companies like Schlumberger and Halliburton Co. will likely benefit most, but the upside will extend to smaller companies as well.

"There will be some trickle-down to smaller companies that have a good niche position — pressure pumping margins will begin to increase and that will help some smaller companies as well," Wood said. "There are smaller companies in the Permian Basin that have good relationships with smaller producers and that may help them out."

One major concern for 2018 is the prospect that U.S. production may surge to a point where it sends prices rapidly downward. While Moody's and S&P Global Ratings agree the credit markets will remain open to producers, there is also a desire for companies to stick to their budgets and turn consistent profit.

"It is very helpful that the capital markets, the equity side, are encouraging companies to be more disciplined, to live with capital resources," Wood said. "That's certainly very helpful [to ratings firms], when the equity market is there to tell them to live within their means."

S&P Global Ratings and S&P Global Market Intelligence are both subsidiaries of S&P Global Inc.