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No Visible Sign of Improving Natural Gas, Oil Prices Through 2017, Moody's Says

Next year looks to be the second no good, very bad year in a row for the global oil and gas industry, with no visible signs of improving commodity prices through 2017, Moody's Investors Service said Thursday.

Moody's in its global exploration and production (E&P) outlook for 2016 used North America as a proxy because E&Ps predominantly are based in the United States, where they also have a high proportion of production and reserves. Fundamental business conditions are expected to worsen, said analysts Peter Speer and Steven Wood.

"With the large buildup in inventories and supply continuing to exceed demand in the near future, we see oil and natural gas prices rising only modestly through 2018,” they said.

Moody's Henry Hub gas price assumption is $2.75/Mcf in 2016, $3.00 in 2017 and $3.25 in 2018. Prices over the medium-term are assumed to average $3.50/Mcf.

"We expect that natural gas prices will remain flat in 2016, reflecting continued strong natural gas production and storage levels," the analysts wrote. "Production of natural gas and natural gas liquids (NGL) look set to continue rising through 2016. We also think these forecasts have downside risk, since lower oil production would result in lower production of associated natural gas, and since low commodity prices will strain the E&P companies' capital investment in both natural gas and NGLs.

"But outright declines in production of natural gas and NGLs look unlikely in 2016, given the vast amount of natural gas and NGL reserves that can be developed economically in North America -- even at current low prices." The West Texas Intermediate price is assumed to average $48/bbl next year, $55 in 2017 and $63 in 2018. Weak oil prices "will carry over to natural gas liquids."

Moody's expects E&P capital expenditures (capex) to decline overall next year by "at least" 10-15%. Operating costs should drop another 3-5% after falling an estimated 13-15% this year. E&Ps will continue "grinding out cost reductions, preserving precious liquidity and trying to sustain property portfolios and proved reserves until commodity prices rise to levels more sustainable for the industry."

Production will decline year/year, with lower oil output "offsetting any growth" in natural gas and natural gas liquids. Proved reserves are poised to fall through next year following negative price revisions and lower capex.

Oilfield service (OFS) companies "will continue to bear some of the brunt" of low prices as E&Ps negotiate for lower prices "but it is difficult to see much more capacity for further price concessions." How far E&Ps are able to reduce capex also is going to be limited since they have to invest to replace depleting production "but they will allow production volumes to decline to preserve cash if weak commodity prices leave them with little choice."

Lower activity levels have given E&Ps "immense bargaining power" with the OFS sector. As new/existing drilling contracts are renegotiated, E&Ps have seen lower dayrates than in 2014. However, since the contracts now are re-priced more frequently at spot market terms, "we believe completion costs have bottomed."

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