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Outlook for independent oil and gas explorers remains positive

Publication Date: 03 May 2018 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav Sharma (Associate Editor ReachX)
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Equity Fundamental Macro Commodity Energy

The outlook for the global independent oil and gas exploration and production (E&P) sector remains positive, according to Moody's.

In a recent report for its clients, the ratings agency noted that the EBITDA of independent players will continue to grow strongly over the next 12 to 18 months, even as commodity prices stay within a moderate range, although higher costs could cut into cash flow.

"We expect the global independent E&P sector to see EBITDA growth in the 18%-22% range in 2018, continuing 2017's robust growth after steep declines in 2015-16. Oil and natural gas production will increase by about 10% on average this year, while commodity prices remain range-bound, but well above onshore breakeven levels," Amol Joshi, Vice President at Moody's said. 

Capital efficiency in the global E&P sector is improving as companies have achieved sustained technological improvements in drilling and completing wells while commodity prices stabilise at moderate levels, Joshi added. 

Higher prices have revived capital spending onshore, though most new offshore projects remain uneconomic. Capital spending will increase by about 10% this year, after a 30% increase in 2017, and E&P firms are likely to maintain good access to funding sources.

Meanwhile, M&A activity will be more strategic after a wave of tactical acquisitions, divestitures and swaps in 2016-17.

Producers with strong balance sheets will seek efficiencies of scale in higher-return basins, while smaller firms will look to combine with larger ones to accelerate development, Moody's said.

High valuations relative to cash flow will keep financial firms on the sidelines, with strategic mergers or all-stock acquisitions likely to make the most economic sense for E&P companies with similar valuations.

And following a surge in drilling and completion costs last year, E&P capital costs could inflate by 10%-15% in 2018, cutting into cash flow growth. Oilfield services firms are regaining their pricing power, particularly in prolific onshore basins, though large oil and gas producers with significant purchasing power will be able to limit cost increases. Local sourcing of sand, wherever feasible, will limit completion cost increases for companies. E&P firms will also look for cost efficiencies through supply-chain management, drilling mainly in prolific plays, and M&A deals.

Producers debt-funded high capital spending in 2010-14 to increase production when oil prices were high. While E&P companies have improved efficiencies and reduced costs during the downturn, aggregate debt balances will remain elevated this year, despite stronger cash flow and liquidity. Smaller firms have reduced their debt balances through restructurings and bankruptcies, but the largest companies' aggregate debt balance is still in line with 2014 levels, Moody's said. 

And although some larger firms have paid down debt, others intend to use their improved cash flow to increase shareholder returns.

Disclosure:

I have positions in the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma (Associate Editor ReachX)

 

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