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S&P Global Ratings Revises Oil And Natural Gas Price Assumptions


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S&P Global Ratings Revises Oil And Natural Gas Price Assumptions

S&P Global Ratings revised its West Texas Intermediate (WTI) and Brent crude oil price assumptions, as well its Henry Hub and AECO natural gas prices. These revisions are effective immediately.

Table 1

S&P Global Ratings' Oil And Natural Gas Price Assumptions
--New prices-- --Old prices--
Brent ($/bbl) WTI ($/bbl) Henry Hub ($/mmBtu) AECO Hub ($/mmBtu) Brent ($/bbl) WTI ($/bbl) Henry Hub ($/mmBtu) AECO Hub ($/mmBtu)
Remainder of 2020 40 35 2.75 2.00 30 25 2.00 1.25
2021 50 45 2.75 2.00 50 45 2.25 1.50
2022 50 45 2.50 1.50 55 50 2.50 1.50
2023 and beyond 55 50 2.50 1.50
bbl--Barrel. WTI--West Texas Intermediate. mmBtu--Million British thermal units. AECO--Prices are rounded to the nearest $5/bbl and $0.25/mmBtu. Source: S&P Global Ratings.

We use this price deck to assess corporate and sovereign credit quality, in particular for exploration and production (E&P) companies and for oil-producing countries, in accordance with the ratings methodology described in "How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions," published Sept. 28, 2018.

Over the next several weeks, we will conduct reviews on investment-grade and speculative-grade E&P and oilfield services companies reflecting the new price assumptions. We believe the current deck to be somewhat supportive of credit quality for many of the rated issuers but not sufficient enough to warrant wholesale upgrades. Rather, the more likely occurrence would be outlook revisions to stable from negative. With respect to the seven investment-grade credits listed below, it's possible we could revise a few of the outlooks to stable, particularly producers with a higher balance of natural gas production. Although 2021 assumptions for crude oil are not changing, stronger pricing for the second-half of 2020 and increased natural gas price assumptions should support some improvement of financial measures in the near term, though longer-term performance is expected to be relatively flat based on our price assumptions.

Table 2

Upstream Oil And Gas Issuers On The Fallen Angel Cusp
Current Rating Current outlook

Marathon Oil Corp.

BBB- Negative

Cenovus Energy Inc.

BBB- Negative

Ovintiv Inc.

BBB- Negative

Cimarex Energy Co.

BBB- Negative

Devon Energy Corp.

BBB- Negative

Diamondback Energy Inc.

BBB- Negative

Hess Corp.

BBB- Negative
Note: Ratings are as of Sept. 15, 2020. Source: S&P Global Ratings.

Oil prices have rebounded since their lows in mid-April following unparalleled shocks to demand from the COVID-19 pandemic. Largely because of massive supply cuts from OPEC and Russia and the gradual reopenings of global economies, oil prices have rebounded; Brent is now trading in a $40-$45/barrel range. Our near-term price assumptions generally reflect the shape of the futures curve, which is relatively flat given the uncertainty about the global economic recovery and the potential for increased non-OPEC supply.

Chart 1


More recently, oil has been trading slightly weaker given concerns about demand and a resurgence of the coronavirus. An increase in oil prices faces headwinds given lackluster global refinery margins and high crude and product stocks. It likely will be some time before oil demand rebounds to pre-pandemic levels, largely due to a lag in aviation and a slow rebound in global economies. However, given recent actions, we believe OPEC will continue to be supportive of prices even if demand falls further.

Natural gas prices in North America have rebounded over the past month largely because of steep reductions in associated byproduct gas, improving global liquefied natural gas (LNG) prices, and an unseasonably warm summer. Going forward, LNG exports, power sector demand, and associated gas production will be key drivers. We believe all three will be supportive of gas prices. LNG prices and power demand are recovering, and oil prices will probably remain in a band that doesn't meaningfully increase byproduct gas production. With an average breakeven shale price of $50/barrel, near-term shale oil production growth will likely be relatively muted compared to historical levels.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Thomas A Watters, New York (1) 212-438-7818;
Secondary Contacts:Simon Redmond, London (44) 20-7176-3683;
Carin Dehne-Kiley, CFA, New York (1) 212-438-1092;
Paul B Harvey, New York (1) 212-438-7696;

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