The North American oil and natural gas industry's liquidity remains sound despite the turbulence in the credit markets, but if natural gas prices continue to decline, it could lower the value of reserves and the borrowing base of many exploration and production (E&P) companies, Moody's Investors Service said.

What has enhanced liquidity across the oil and gas sector are historically high commodity prices, strong pre-capex (capital expenditures) cash flows and elevated asset values, Moody's said in a special commentary.

"Near-term debt maturities are manageable, and most companies also have access to long-term committed facilities from banks," said Senior Analyst Ken Austin, who co-authored the report with Senior Credit Officer Steve Wood. "Companies across the energy spectrum have taken advantage of the robust bank market to increase commitments and extend maturities."

Even energy companies with Prime-2 short-term ratings have continued to access the volatile commercial paper (CP) market, unlike some issuers with that rating in other industries. The reasonable demand for energy company paper "reflects investors' desire to move out of asset-backed CP and the perception that the energy companies are strong financially," the report said.

However, E&Ps could be restrained by lower gas prices, which would then have a follow-on effect for the drillers and oilfield services companies. Conversely, a "protracted credit squeeze" could have a spillover effect even if oil prices remained high.

"Weaker companies that depend particularly heavily on continued access to capital would face a liquidity squeeze and possible ratings downgrades if general liquidity conditions tightened and reduced their ability to fund capital projects," said the report. "In addition, some companies that may need waivers for covenant violations would be exposed over the near term."

However, the analysts do not expect any problems unless the market disruptions drag into 2008.

In a survey of the management of the energy companies Moody's rates, it determined the following:

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