Global oil and gas industry to cut 2016 spending on continued commodity weakness – Moody’s

Global oil and gas industry will reduce capital spending and work toward leaner budgets in 2016, as commodity prices continue to slide, Moody’s Investors Service said.

“Excess supply will continue to drag on commodity prices in 2016 in the global oil markets and the US natural gas market,” said Steven Wood, a Moody’s Managing Director. “Furthermore, the potential lifting of sanctions against Iran could bring even more supply to the market in 2016, offsetting any expected declines in US production.”

Low commodity prices have led to a deterioration in cash flows and liquidity, straining the already limited financial flexibility of speculative-grade oil and gas companies, the report said, adding that even large, diversified investment-grade companies will struggle with diminishing financial flexibility and increasing financial leverage.

Moody’s expects upstream capital spending to drop by at least 20 percent-25 percent, leaving the oilfield services and drilling industry the most stressed sector in 2016. Integrated and national oil companies will cut capital spending and thus lower capital budgets in 2016, but oilfield services and drilling companies in particular will emphasize cost reduction as they adjust to reduced demand.

Overall, the oil and gas sector will likely see a rise in distressed exchanges and defaults in 2016, according to the report, “Oil and Natural Gas Industry — Global: Persistent Weak Prices in 2016 Rein in Capital Spending, Heighten Financing Risk.”

“As a result of deteriorating cash flows and credit investors increasingly avoiding the struggling energy sector, Latin American national oil companies will face high refinancing risk,” added Nymia Almeida, a Moody’s Vice President – Senior Credit Officer. “On top of significant maturities due in 2016-17 for Mexico’s PEMEX, Brazil’s Petrobras and Venezuela’s PDVSA, currency devaluations will raise import costs, capital spending and interest payments.”

Credit metrics will also continue deteriorating for China’s three national oil companies — China National Petroleum Corporation, China Petrochemical Corporation and China National Offshore Oil Corporation — through at least 2017. Furthermore, Russia’s weak rouble will help the country’s national oil companies withstand low oil prices, but economic sanctions limit access to long-term external financing from US and EU financial and capital markets for the Russian giant Rosneft, the report said.

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