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Credit Agency: Don't Count Producers Out

Credit Agency: Don't Count Producers Out

Although producers are seeing a significant rebound from the market doldrums over the past couple years, Fitch IBCA sees trouble ahead in the form of increasing finding and development costs and significant opposition to pipeline construction.

After studying the financial and operational situations of 15 major oil and gas producers, the international credit agency recently published a report highlighting new challenges that are just around the corner. The study analyzed a peer group including companies such as EOG Resources, Anadarko Petroleum, Occidental, Talisman Energy and Vastar. It judged all aspects of a companies balance sheet, including its debt leverage, cash flow and earnings, and listed each individual company's strengths and weaknesses concerning their credit outlook.

For both the short-term and the long-term, Fitch is optimistic about the peer group's financial outlook. Commodity prices, which were mostly to blame for the poor years, have turned around and Fitch expects that trend to continue. The discipline showed by the peer group companies during the bad stretch, overall M&A activity and demand-growth projections all point to positive long-term benefits, Fitch said in the report. Fitch also pointed out that a major boon to the producers' cause are projections from the National Petroleum Council and the Energy Information Administration forecasting a 30 Tcf market by 2015.

Yet dark clouds are on the horizon in the forms of more costly drilling opportunities. Fitch estimated that "hundreds of billions of dollars will be spent over the next decade for oil and gas development." The bulk of the costs will come from the expense of drilling in the deepwater Gulf of Mexico.

Another obstacle is the potential problems in building new supply transportation. "Building pipe is not a simple task currently, with an emotionally heightened 'not in my backyard' attitude found in corridors serving key high-growth markets....Additionally, a shortage of shippers willing to commit to capacity under long-term contracts makes pipeline financing more difficult."

For a copy of the report, please visit www.fitchibca.com or call (800) 853-4824. John Norris

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