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Big Oil Profits to Contract Sharply, Dimming Long-Term Production Targets, Says Moody's

ExxonMobil Corp., Chevron Corp., BP plc, Royal Dutch Shell plc and their integrated peers are facing a world of pain as this year's earnings contract by 20%, with only a modest recovery expected in 2016, Moody's Investors Service said Wednesday.

Big Oil, which drives a lot of spending in North America's onshore and offshore, is going to be pressured by negative free cash flow (FCF) over the next year, which should punish longer-term production growth.

Moody's outlook "reflects our expectations for the fundamental business conditions in the industry over the next 12-18 months," said Senior Vice President Thomas S. Coleman and his team of analysts.

The credit ratings firm has revised its oil price outlook lower several times since late 2014 and also expects natural gas prices to "stay near recent low levels well into 2016, which should aggravate the industry's negative free cash flow profile," Coleman wrote. Across the board, it's now "lower for longer," he said.

Moody's in August reduced its West Texas Intermediate (WTI) price deck outlook for 2015 to $50/bbl, with Brent crude set to average $55, both $5.00 lower than previous assumptions. In 2016, WTI is expected to be around $52, with Brent at $57.

"Based on abundant supply, we are also maintaining a flat view on North American natural gas prices at Henry Hub -- the industry’s chief measure of natural gas prices -- at $2.75/MMBtu in 2015 and $3.00/MMBtu in 2016, reflecting high continued shale gas and liquids-rich production, but also growing demand in the power generation sector."

As prospects dim for a price recovery, the big operators are rephasing, deferring and canceling projects. A slew of new supply prospects, including several in the deepwater Gulf of Mexico, are on the drawing board or nearing completion, but "sustained spending cuts will hurt longer-term production growth, and curves will flatten in the post-2017 timeframe."

Moody's expects the peer group to remain negative FCF by as much as $80 billion in 2015, versus negative $26 billion in 2014. The cash flow gap at recent pricing levels "should ease somewhat" in 2016 to an estimated $55 billion.

"Virtually all" of the global operators have reset near-term oil price outlooks to a band of $60-70/bbl. Capital spending "should be down 10% or more across the sector in 2015, but the cuts will be bigger for some," Coleman said. More spending cuts also could happen before this year ends.

"Our first look at 2016 indicates slightly higher spending for the peer group," said Coleman. "However, we think that if low oil prices persist in the $50/bbl area, capital spending is more likely to decline further next year..."

Producers confirmed to Moody's that they would maintain spending on mega projects, which include deepwater, liquefied natural gas development and oilsands, as well as others where final investment decisions have been made.

"Most of the companies have new long-plateau projects coming onstream in 2015-2016 and expect sustained spending cuts to really only affect production curves after 2017," Coleman noted.

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