While sluggish energy prices should moderately dent earnings at the top integrated oil and gas majors in the second half of 2019, Moody's Investors Service is maintaining an overall stable outlook on the sector for the next 12 to 18 months due to an expected recovery into 2020 that will be driven by output growth and better refining margins.
"We expect the global integrated oil and gas industry's EBITDA to decline by 4%-5% in the second half of 2019 but for EBITDA to increase by around 5% in 2020. Our projections are based on a West Texas Intermediate crude oil price of $60 per barrel in H2 2019 and in 2020, a price level that is 7.5% lower than the average oil price of $65/bbl in 2018," Moody's said Sept. 26 in the annual report.
Bottoming out in 2018, production costs and capital spending are likely to rise, but the sector will remain leaner and more capital efficient than it was before the 2015 oil price crash, Moody's senior vice president Sven Reinke said.
Moody's said that after two years in the black, the majors could see free cash flow, or FCF, turn slightly negative this year and possibly fall to zero in 2020 amid a combination of lower operating cash flow and rising capital investments as well as higher share buyback programs and dividend payments. Plans by Exxon Mobil Corp., Chevron Corp. and BP PLC to hike dividends will drive sectorwide dividend payments to a record $71 billion in 2020, the analysts noted.
Moody's said it is projecting funds from operations, or FFO, will decline to $224 billion this year from $259 billion in 2018, and dividend payments will rise to $68 billion this year from $64 billion in 2018, driven by its $60/bbl West Texas Intermediate price assumption.
"Accordingly, $35 billion less FFO and $4 billion higher dividends will wipe out last year's positive FCF of $36 billion resulting in a slight negative FCF for 2019. FCF generation will only be marginally better in 2020 as another increase of dividend payments by $4 billion to $71 billion and $5 billion higher capital investments will be offset by FFO rising by $15 billion to $239 billion on the back of higher upstream production and slightly higher downstream earnings," Moody's said.

The Moody's analysts added that the credit ratings of most of the integrated oil and gas companies have improved over the last three years on the back of the oil price recovery but also due to cost-cutting measures and significant reductions in capital investment.
Moody's said it could change its stable outlook for the sector to positive if West Texas Intermediate oil prices remain above the high end of its $50/bbl to $70/bbl range for a sustained period. Such a price level could drive up annualized EBITDA by more than 5% and result in FCF much higher than anticipated in the next 12 to 18 months, the analysts said.
"We would change the outlook to negative if oil prices fell sustainably below the midpoint of our oil price range, thereby materially reducing EBITDA," Moody's wrote.
