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Moody's: Slower E&P Growth through 2013

Fading oil and natural gas liquids (NGL) prices, butting into subdued world economic conditions, point to slower exploration and production (E&P) growth for the next two years, according to Moody's Investors Service.

The outlook for global independent E&Ps has fallen to "stable" from "positive," which reflects analysts' views of industry expectations over the next year to 18 months, they said in a recent report.

Prices for oil and natural gas liquids (NGL) have "weakened considerably and appear unlikely to surge again in 2012 or 2013," which in turn lowers earnings expectations for companies "most geared" for that type of output, analysts wrote in an an update on the sector.

Subdued pricing also has been cited by other analysts. Most recently Raymond James & Associates Inc. analysts said in late June they were pessimistic about drilling for gas and especially NGLs until the second half of 2014. A "meaningful rebound" isn't likely until the second half of 2014 through 2015 (see NGI, July 2). Standard & Poor's Ratings Services also has revised its NGL pricing assumptions for 2012, 2013 and 2014 (see NGI, June 18).

Moody's existing price assumptions for natural gas were kept the same until the end of 2013: Henry Hub at $2.50/MMBtu in 2012; $3.00 in 2013 and $3.50 "beyond" 2013. The "stress" price is $2.00. "A number of elements will help near-term natural gas prices, including increased utility and industrial demand," said analysts. "A normal winter would offer the best near-term support for natural gas prices.

"Longer-term improvement in natural gas prices will come from U.S. exports of liquefied natural gas and conversion of the commercial utility fleet to natural gas power. But these supports will take time to ramp up, and none are game changers."

Meanwhile, an NGL oversupply "will pressure prices" through the end of next year, according to the Moody's team. NGL price assumptions now are set at $36/bbl for 2012, $34 for 2013 and beyond, with $24 at a stress price. The NGL price assumptions, said analysts, were cut to 40% of West Texas Intermediate (WTI) crude prices, down from an earlier assumption of 50%. "NGL prices track more closely with crude than natural gas, but exposure to NGLs will not bring E&P companies the same benefits [they] had in the months before mid-2012."

Analysts also lowered their assumptions for crude prices through 2013. While prices still remain "fairly robust by historical standards, the spread between benchmark Brent and WTI crudes will narrow to about $5 in 2014." WTI for 2012 is assumed at $90/bbl, with 2013 and beyond at $85/bbl; a stress price is $60. Brent is assumed at $100 for 2012, $95 in 2013, $90 beyond 2013 and at $60 for a stress price.

E&P capital spending plans "remain strong" across the sector," but budgets "may contract modestly given the sharp drop in oil and NGL prices in the second quarter of 2012," said analysts. However, even if capital expenditures are trimmed, "we expect production to grow robustly through 2013."

Moody's stable outlook on the sector reflects analysts' views that the industry's earnings "will grow in the mid-to-high single digits year/year through mid-2013." An upgrade to "positive" again is possible if E&P sector earnings grow by more than 10% (annualized) over the next 12-18 months, or move to "negative" if growth were to retreat by 10% or more, said analysts.

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