The credit outlook for the global oilfield services and drilling industry is growing increasingly negative, amid low oil prices and industry cutbacks, says a Moody’s Investors Service report published on Friday.
The industry is continuing to endure a “severe downturn” as weak energy prices are driving spending cuts by exploration and production (E&P) companies. “As credit conditions deteriorate further, defaults are set to increase,” the report says.
Moody’s expects the combination of energy prices and low spending by E&P companies to reduce EBITDA in the OFS industry by 30%-40% in 2016, and that this delays any chance of a recovery until at least late 2017. Even if oil prices rebound modestly in 2016, recovery in the OFS sector will lag, “given the industry’s overcapacity and the gradual increase in drilling activity,” the Moody’s report says.
Global land drilling hit a 17-year low in April, the report adds, and U.S. rig activity has declined to its lowest point in 40 years.
“The OFS industry is facing the worst downturn since the early 1980s after an unprecedented drop in global oil and North American natural gas prices,” says Moody’s analyst Sajjad Alam. “Drilling activity has plummeted in most oil producing regions, curbing demand for oilfield support services.”
“We expect the U.S. rig count to set a cyclical bottom in 2016 and then inch up in 2017 as oil markets narrow the supply/demand gap,” adds Alam.
Given these poor conditions, Moody’s expects that “a number of OFS companies … will not survive the protracted downturn without restructuring their debt,” the report says.