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Moody's 'Positive' on Liquids-Focused E&Ps

High prices for oil and natural gas liquids (NGL) relative to dry natural gas will continue to save the day for independent exploration and production (E&P) companies, Moody's Investors Service said in a note Wednesday.

The ratings agency has a "positive" outlook on the sector, despite depressed dry gas prices. "Natural gas prices continue to languish amid a shale-based supply glut and the recent warm winter in North America," said Moody's Senior Vice President Terry Marshall, author of the report. "We see no abatement of crude prices or any improvement in natural gas prices before mid-2013."

Oil or NGL-focused producers such as Marathon Oil, Continental Resources and Whiting Petroleum will benefit from high prices through mid-2013, but natural gas-oriented producers such as Encana Corp., EQT Corp. and WPX Energy could face margin pressure, Moody's said.

Still, some independent E&P companies will find oilfield services and other costs easier to absorb, due to robust oil prices and improved margins from NGLs, the ratings agency said. Joint ventures and debt issuance to fund new projects are increasingly common as producers seek to boost production and take advantage of high prices for crude and NGLs.

"Oversupply continues to weigh on natural gas prices in North America, and we see no near-term catalyst for improvement," Moody's said in the note. "Even with many E&Ps focusing as much as possible on oil and NGLs, and natural gas rig counts at 10-year lows in early 2012, natural gas production will still grow by about 2% in 2012.

"Still, surging oil prices more than offset weak natural gas prices for the E&P sector as a whole through mid-2013. We assume a price of $95/bbl for benchmark West Texas Intermediate crude in 2012, $90/bbl in 2013 and $85/bbl beyond 2013. Our price assumption for natural gas reflects the decade-low prices of early 2012 at $2.50/MMBtu for 2012, $3.00/MMBtu for 2013 and $3.50/MMBtu beyond 2013."

Moody's industry outlooks reflect the rating agency's expectations for fundamental business conditions in the industry over the next 12 to 18 months. The positive outlook for the E&P industry's reflects Moody's view that sector earnings before interest, taxes, depreciation and amortization (EBITDA) will grow by more than 10% year on year through 2012 and at least the first quarter of 2013. Moody's said it would move the outlook to "stable" if it projected that the sector's EBITDA would grow in a range from minus 10% to 10% (annualized) over the next 12-18 months. Expectations of a 10%-or-greater drop in EBITDA growth would mean a "negative" outlook.

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