North America’s oil and natural gas explorers are trained on boosting capital returns this year, aiming for profitable growth in existing leaseholds, with capital discipline still the mantra, according to Moody’s Investors Service.

In its annual oil and gas trends report, the Moody’s team said 2018 oil prices should hover from $40-60/bbl this year, even as the Middle Eastern-led cartel, the Organization of the Petroleum Exporting Countries (OPEC), tempers output until 2019.

Moody’s in early December said Henry Hub natural gas should average $2.50-3.50/MMBtu over the medium term, defined as through 2019, up from a previous forecast of $2.00-3.50.

Higher oil prices within or above Moody’s range “will see supply grow as countries lessen their compliance with production quotas and U.S. shale production continues to increase,” said analysts. However, abundant U.S. natural gas supply is expected to constrain prices, even as demand rises.

"Political unrest in the Middle East, alongside assumptions of OPEC extending its agreement to cut production, helped to bolster oil prices in late 2017," said Moody’s Senior Vice President Terry Marshall. "Yet, even with these factors offering a boost, prices will likely remain range-bound, and possibly volatile, on a combination of increasing U.S. shale production, reduced but still significant global supplies, and potential noncompliance with agreed production cuts, especially if demand growth is more tepid."

More strategic mergers and acquisitions (M&A) also are expected in 2018, “increasingly between larger companies across the oil and gas industry…following 2017’s tactical asset acquisitions, divestitures and swaps.”

M&A valuations may rein in larger mergers in the exploration and production (E&P) sector, even as M&A lags in the oilfield services (OFS) and midstream sectors. Independent E&P firms should be “particularly attractive” to larger independents and the integrated producers.

"In 2018, larger E&P companies with strong balance sheets will seek efficiencies of scale in higher-return basins," said Moody’s senior analyst Amol Joshi. "For their part, smaller and sometimes over-leveraged firms could create value by combining with larger producers to accelerate development."

The global OFS industry should continue to recover in 2018, “but the overall health of the sector will remain frail, and OFS companies face ongoing pressures from customers, reactivation and upgrade expenses, and increasing labor costs.”

Meanwhile, energy infrastructure providers increasingly may eliminate incentive distribution rights, retain more cash and simplify corporate structures, all of which would be credit-positive actions, assuming more leverage isn’t added, said Moody’s.

Global oil demand should continue to strengthen through 2040, with light vehicle oil demand growth peaking by 2030, on steadily increasing fuel efficiency for light passenger vehicles rather than the rise of electric vehicles, according to Moody’s.

“Major integrated oil companies will invest in renewables and alternative-energy technologies in 2018, and some will continue their transition toward natural gas, with its more favorable carbon footprint and good long-term demand prospects.”