Moody’s Investors Service has revised its prospects for the global oil exploration and production industry to stable from negative.
Industry earnings will slowly rise over the next 12 to 18 months on the back of slightly higher oil prices, while natural gas producers will continue to benefit from the reduced supply.
“We expect E&P sector EBITDA to rise by about 5% between mid-2020 and mid-2021 as oil prices stabilize around $40 per barrel,” said Sajjad Alam, senior analyst at Moody’s.
“Factors including lower operating costs and oilfield services expenses, modest hedge protection and easier access to midstream infrastructure, will partially support margins through at least the middle of next year.”
Oil exploration production firms have slashed capital spending much more quickly this year than they did during the 2015-16 downturn, Alam says.
Spending is down 40%-50% this year, and absent higher oil prices spending will continue at these low levels in 2021. This will lead to flat volume growth in 2021, said Moody’s.
Firms that suspended dividends and share buybacks in 2020 will likely use any excess cash flow to maximize shareholder returns or pay down debt, before increasing capital spending, it added.
Default risk will remain high for weaker companies through 2021, with oil prices at $45 per barrel or higher needed to reduce such financial difficulties.