Weather has created a haze on the direction of the North American natural gas market, but supply and demand fundamentals continue to support favorable pricing in the longer term, Standard & Poor's Ratings Services (S&P) energy analysts said Wednesday.
The S&P 18-page report, "The Top 10 Trends in Global Oil and Gas for 2007," offers an analysis of what's ahead for the oil and gas industry. Overall, the team of analysts said they continue to view domestic demand growth, the limited availability of imported liquefied natural gas supplies (at least for the intermediate term), and steeper decline curves as "props for high natural gas prices."
However, "we do see a potential shift in expectations for North American E&P [exploration and production] and oilfield service firms' financial performance in 2007. Specifically, we expect that financial results for firms with significant North American concentration could weaken relative to the very strong levels of performance demonstrated over the past two years."
Last year credit trends were favorable for E&Ps, but this year "could be more balanced with regard to rating outcomes," analysts noted.
The smaller natural-gas focused E&Ps and service providers are most at risk of negative ratings actions "if prices fall below $5/Mcfe for several consecutive quarters because of their limited financial flexibility and aggressive leverage," the report noted. "More specifically for E&P firms, those with limited hedge protection, thin liquidity, and/or higher-than-average break even cost structures could be more vulnerable to downgrades."
Upstream capital spending levels in 2007 are expected to be up 5-10% overall -- except in North America, where S&P expects flat to "modestly down" spending. North American spending "will largely hinge on where natural gas prices are after the winter heating season."
Analysts also expect a regional shift in spending as capital is reallocated from higher-cost areas to those with more compelling economics.
"For example, the outlook for activity levels in Western Canada in 2007 remains weak. Canadian rig counts are down roughly 10-15% year-over-year, and many E&P firms with operations in the region have cited high service costs and natural gas price uncertainty as the main catalysts for weaker planned spending there." Activity in the shallow-water Gulf of Mexico (GOM) also appears to be slowing down.
E&P merger and acquisition (M&A) activity is expected to continue at a "brisk clip." Analysts expect "national and foreign oil companies continuing to increase their global presence through acquisitions." In particular, the GOM continues to attract interest from foreign players, including Norsk Hydro ASA and Statoil ASA, which are merging.
Rising acquisition costs are a concern, particularly because of short-term price uncertainty. "Nevertheless, acquisitions can sometimes offer producers a more economic way to attain significant reserve and production growth. Furthermore, they can hep improve geographic and reserve diversity as well as allow companies to gain critical mass, technical expertise, and scale advantages in specific regions."
Intelligence Press Inc. All rights reserved. The preceding news report
may not be republished or redistributed, in whole or in part, in any
form, without prior written consent of Intelligence Press, Inc.