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

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

For both the short-term and the long-term, Fitch is optimisticabout the peer group’s financial outlook. Commodity prices, whichwere mostly to blame for the poor years, have turned around andFitch expects that trend to continue. The discipline showed by thepeer group companies during the bad stretch, overall M&Aactivity and demand-growth projections all point to positivelong-term benefits, Fitch said in the report. Fitch also pointedout that a major boon to the producers’ cause are projections fromthe National Petroleum Council and the Energy InformationAdministration forecasting a 30 Tcf market by 2015.

Yet dark clouds are on the horizon in the forms of more costlydrilling opportunities. Fitch estimated that “hundreds of billionsof dollars will be spent over the next decade for oil and gasdevelopment.” The bulk of the costs will come from the expense ofdrilling in the deepwater Gulf of Mexico.

Another obstacle is the potential problems in building newsupply transportation. “Building pipe is not a simple taskcurrently, with an emotionally heightened ‘not in my backyard’attitude found in corridors serving key high-growthmarkets….Additionally, a shortage of shippers willing to committo capacity under long-term contracts makes pipeline financing moredifficult.”

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

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