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Oil prices seen at $35-$40/b, US oil producers at risk of rating actions: S&P Global Ratings

Highlights

US production may start to decline next year

Don't count on repeat of 2015-2016 efficiencies gained

Russia's breakeven seen at $51/b vs $83/b for Saudis

Dubai — S&P Global Ratings lowered its 2020 price assumptions for Brent to $40/b and WTI to $35/b and warned of possible rating actions for some producers, particularly in North America, in the aftermath of Monday's oil price crash.

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The agency, whose previous estimates were $60/b for Brent and $55/b for WTI, said producers may not weather the current downturn as well as they did in 2015-2016. It will be conducting reviews on all investment-grade and high-yield exploration and production companies and oilfield services companies in the coming weeks.

"Producers, particularly those in North America, are under tremendous pressure by investors to limit spending, maintain positive free cash flow, and enhance shareholder returns," the ratings agency said Monday in a report. "During the previous downcycle (2015-2016), many producers were successful in significantly reducing their costs and improving their balance sheets through asset sales and equity issuance, which helped reduce the number and order of magnitude of rating actions. However, we don't expect producers to be able to achieve anywhere near the efficiencies gained last time."

Oil prices fell to a three-decade low on Monday after the 23-member OPEC+ failed to agree on extending and deepening oil output curbs beyond March, raising the potential for producers to pump at will starting in April. The oil price crash battered energy stocks from Europe to the US, raising fears of further declines as more oil comes to the market.

Oil prices on Tuesday recouped some of their losses, with WTI up 7% to $33.32/b at 2:47 am CST time and Brent trading up 6.05% to $36.44/b.

Capital crunch

Most oil companies will not be able to raise capital as efficiently as they did during 2015-2016, S&P Global Ratings said. During 2015-2016, oil prices crashed, reaching a low of less than $30/b in the beginning of 2016, a level that prompted OPEC kingpin Saudi Arabia to talk to non-OPEC oil producers led by Russia to collectively cooperate in trimming output to return the market to balance.

"It's likely rating actions in the investment-grade category could be more severe than during the last cycle," it said. "For the high-yield segment, in particular, issuers without hedges, those who face upcoming maturities, and are somewhat squeezed on borrowing-base revolving credit facilities will most likely face multiple notch downgrades."

US oil production is unlikely to dip immediately, but could decline next year, the agency said. US oil production is forecast to rise by 960,000 b/d in 2020 to a record of 13.2 million b/d, according to the Energy Information Administration, below its previous estimate for a 1.06 million b/d hike.

"We don't expect US production to decline immediately due to hedges and previously drilled wells, but rather we should begin to see the impact on production early next year as spending levels decline and we see steep decline curves," S&P Global Ratings said. "The market should experience a sharp decline in production from the US next year similar to what happened during the last downturn."

Oil demand

Coronavirus and restrictions on travel and transport will impact global oil demand, the agency said. The International Energy Agency said on Monday global oil demand would contract in 2020 for the first time since the 2009 financial crisis, declining by 2.5 million b/d in the first quarter from a year-earlier period.

"Oil demand growth could contract, or be broadly flat in 2020. This largely reflects the impact from the coronavirus on travel and transport fuel demand," S&P Global Ratings said. "This is certainly the case with China, which had been a key source of anticipated demand growth, but also globally."

Saudi Arabia, which slashed its oil prices for April exports in what analysts are calling a price-war against Russia, can sustain a low oil price for some time, S&P Global Ratings said.

The Russian government said on Monday the domestic economy could withstand oil prices falling to $25-$30/b and that Russia would maintain its share of the global oil market.

"In the event of a market share grab, we believe Russia has a breakeven oil price of approximately $51 per barrel, although Saudi Arabia has a much higher price of $83 per barrel and is in the midst of an economic transformation (Vision 2030) to reduce its reliance on oil," S&P Global Ratings said. "Also, Russia, Saudi Arabia, and several Gulf Cooperation Council (GCC) nations, have vast financial resources and can sustain a low oil prices for some time."