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Moody's: Gas Woes Weigh on E&P Outlook

Despite a recent winter-driven run-up in natural gas prices, it's still a better thing to have one's energy in the form of barrels than cubic feet, and that will remain so for a while, Moody's Investors Service said in a report released last Tuesday.

While rising oil prices will benefit integrated global oil companies this year, North American exploration and production (E&P) companies, which are largely focused on gas, will continue to suffer from low prices and abundant supplies, Moody's predicted.

"The potential for increased gas production in 2010 outweighs the expected muted recovery in demand," Moody's said. "E&Ps continue to groan under a historically heavy inventory of natural gas, and while winter weather began to push gas prices higher in early 2010, we do not expect inventory or production levels to decline sufficiently this year to support higher prices, suggesting another price retreat may be inevitable. A drop in capital expenditures and drilling activity has failed thus far to stem a glut in gas production."

After a year of collapse and rebound, Moody's said it expects oil and natural gas prices to rise modestly in 2010, with oil at $75/bbl and natural gas at $4.50/MMBtu. "We adjust our pricing guidance for both oil and gas...not to forecast oil and and gas market prices, but to have a baseline approximation to help evaluate risk when analyzing the credit conditions of corporate issuers in the energy sector," the ratings agency said.

Moody's has a negative outlook on three of the four sectors that comprise the oil and gas industry -- E&P, oilfield services and drilling, and refining and marketing. Only integrated oil has had a stable outlook since December.

"The business conditions of these oil and gas sectors depend on each other to a large degree," said Steven Wood, Moody's team managing director. "But even though oil and natural gas prices have rebounded from severe lows, much of the industry remains under great pressure."

Overall, the supply and demand balance is expected to continue to disadvantage the E&P sector, said the report, while oversupply in production will continue hurting oilfield services companies that are heavily involved with North American conventional onshore plays. Oversupply also continues to constrain the refining and marketing sector, and a modest pick-up in demand looks unlikely to compensate for the current high inventories, Moody's said.

Continued capacity rationalization, with more facility shutdowns in highly competitive regions such as the Atlantic Basin and U.S. Gulf Coast, are also likely, said Moody's. Additionally, with financially flexible companies looking for down-cycle opportunities, there likely will be more merger and acquisition activity in 2010.

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