Amid persistently low oil prices, the global energy business is facing a tough year, says Moody’s Investors Service in a new report.
The major companies should fare best, while other parts of the sector are likely to see their earnings come under significant pressure.
The rating agency says that exploration and production (E&P) companies will be hit first, while oilfield services and mid-stream energy operators will feel the knock-on effects of reduced capital spending in the E&P sector. Offshore contract drillers are likely to have their toughest year since 2009, while the integrated oil majors “are the best positioned to react to lower prices”, it says.
“If oil prices remain at around $55 a barrel through 2015, most of the lost revenue will hit the E&P companies’ bottom line, which will reduce cash flow available for re-investment,” says Steven Wood, managing director, corporate finance, at Moody’s. “As spending in the E&P sector diminishes, oilfield services companies and midstream operators will begin to feel the stress.”
The report forecasts that if oil prices average $75 a barrel in 2015, North American E&P companies would likely reduce their capital spending by around 20% from 2014 levels. If they remain below $60 a barrel, it says, spending could be cut by 30% to 40%. Outside North America, E&P firms would likely reduce spending by 10% to 20%, depending on prices, it suggests.
For the oil services sector, Moody’s projects that earnings would fall by 12%-17%, if oil averages $75 a barrel. An average price of less than $60 a barrel could drive earnings down by 25%-30%, it says. Within the sector, Moody’s says that the large players, such as Schlumberger, Halliburton and Baker Hughes, can weather a sustained drop in oilfield activity, whereas the smaller companies would likely come under greater stress.
The slump in oil prices, coupled with a surplus of new rig deliveries, suggests that difficult times ahead for offshore contract drillers, Moody’s notes. Yet, it warns that 2016 could prove even worse for companies that will have to renew contracts on existing rigs at significantly lower rates.
In the midstream sector, a spending cut of 25% or more would make it difficult for operators to maintain earnings growth at current levels of 12%-15%, Moody’s says.
The report indicates that the major integrated oil companies will probably fare better. “Integrated oil companies have been more measured in their response to falling oil prices, typically making investment decisions assuming prices of no more than $50-$60 a barrel, since projects can take years to complete,” it notes. “That said, ExxonMobil, Royal Dutch Shell and Total have announced spending reductions for 2015, while cuts at others, including Chevron and BP, look likely.”