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Moody’s upbeat on oil and gas in 2019
While 2019 will see only gradual increase in drilling activity, oilfield service sector prices will likely increase over medium term
Kay Cashman Petroleum News
Moody’s recent report on the global oil and gas industry examines credit analysts’ themes heading into 2019, finding an industry kicking off the year on steady footing.
The investors service arm of Moody’s predicts the “medium-term price band for WTI crude will be $50-$70 per barrel in 2019.”
West Texas Intermediate crude, the main North American benchmark, has been running about 20 percent less than Alaska North Slope crude: On Jan.8, for example, ANS closed at $59.18 a barrel as compared to $49.78 for WTI.
However, “wide differentials for regional oil and natural gas prices will narrow against the main North American benchmarks in 2019,” as infrastructure comes into service in late 2019 and 2020, which will ease bottlenecks in the Permian, western Canada and other regions, relieving stress on commodity prices, says Moody’s report, which was released Jan. 3.
Expectations are that North American natural gas at Henry Hub - the chief benchmark for U.S. natural gas prices - will average $2.50-$3.50 per million British thermal units, Moody’s says, with natural gas liquids, or NGLs, trading at roughly 45 percent of WTI, for a $22-$32 per barrel average.
“The December 2018 announcement that OPEC and Russia have agreed to cut production by a total 1.2 million barrels per day from October 2018 levels helps alleviate concerns about an oversupplied oil market, which had led to a more than 40 percent drop in crude prices in the past three months,” Terry Marshall, Moody’s senior vice president, says in the report.
“Market expectations for continued strong oil demand growth of 1.4 million bpd have remained in place, despite concerns of slowing demand growth tied to weaker global economic growth, the impact of tariffs and a strong U.S. dollar, especially in the emerging markets,” Marshall continues. “Very high Saudi and Russian production, mixed signals on Iran sanctions, and U.S. presidential pressure on Saudi Arabia to maintain high production levels have all heightened supply volatility.”
The key questions for 2019, Moody’s report concludes, are whether OPEC and Russia will maintain production discipline and what happens when the current agreement expires in June.
Increase in rig activity While 2019 will see “only a gradual increase in rig activity … oilfield services, or OFS, costs will likely rise over the medium term,” Marshall says.
Higher oil prices, he says, will encourage more production activity, which will stimulate already rising OFS prices, “raising the breakeven cost of the marginal barrel and potentially raising medium-term oil prices.”
As far as OFS firms themselves, Sajjad Alam, Moody’s vice president and senior analyst, says the sector faces an “inauspicious start for 2019” after recording steady gains in revenue, utilization and pricing during most of 2018.
“While we expect that overall earnings will increase by 10-15 percent from a relatively low level, most of that growth will likely come only later in 2019 after the heightened oil-price volatility of late 2018,” he says.
“While E&P companies grew cautious after a precipitous 40 percent decline in WTI prices between early October and the end of 2018, we still expect low single-digit growth in E&P spending in 2019. E&P companies have dramatically reduced their cost structures since 2015, and today most companies can break even, reinvest enough to sustain production, and even grow modestly in most regions with oil prices at $50-$55,” Alam says.
E&Ps struggle to boost returns E&P investors looking for higher shareholder returns will continue to wait in 2019, Moody’s says, even though oil and gas companies have made strides in capital efficiency and commodity prices are higher than in the 2015-16 downturn.
Still “investor sentiment is weak and infrastructure constraints reduce prices that E&Ps receive,” the investors service says.
“E&P companies in 2019 will continue to exercise spending discipline and focus on capital efficiency. While labor inflation has increased their operating costs, rising production has largely contained their costs per unit. Higher demand for OFS has raised the costs of drilling and completing onshore wells, but efficiencies have helped most E&P companies offset some of these higher capital costs,” Amol Joshi, vice president and senior analyst says in the report.
Still, elevated oil prices through most of 2018 did not benefit many producers in the Permian, the dominant U.S. producing basin.
“Permian-based E&P companies had increased production beyond what midstream companies could take away, and higher transportation costs will continue to hurt profitability in 2019, while insufficient takeaway capacity could stifle E&P growth plans. Such constraints have soured investors’ expectations over near-term earnings potential. Investor sentiment has weakened - especially at the end of 2018 - amid increased commodity-price volatility, U.S. production growth, renewed economic uncertainty, and tariff wars,” Joshi says, with no mention of Alaska by him or elsewhere in the public version of the Moody’s report.
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