The ongoing oversupply of natural gas hasn't deterred most independent exploration and production (E&P) companies from maintaining a robust drilling pace in the shale plays because of the shift by many to crude and natural gas liquids (NGL) for margin relief, Moody's Investors Service said in a report.

While weak gas prices continue, they may have bottomed, which stabilizes the global sector, said Senior Credit Officer Kenneth Austin, who authored Moody's outlook.

"Demand may begin a very slow climb back as the U.S. economy improves, but this recovery is still a bit shaky and may take some time," Austin said. "Still, as many E&Ps continue to modify their strategies by targeting more oil and NGL production, there is currently an opportunity to improve margins and reduce the pressures of focusing purely on natural gas production."

Some of the oily margin relief, however, will be "offset by still-rising levels of drilling activity, which can keep raising oilfield services costs." E&P companies "can still capture margin benefits for some time, as long as oil prices remain strong -- as we expect them to do into 2011-- and as long as NGL prices do not come under pressure from oversupply."

Accessible capital markets and attention from large international companies through joint ventures has enhanced the sector's liquidity, he said. This improved liquidity also has cushioned the producers against "any disappointment from early stage shale plays, weak gas prices and rising services costs."

Since the beginning of this year the E&P sector has taken advantage of low interest rates and an accessible bond market to bolster liquidity, Austin noted. The surge in bond issuance also "removes some uncertainty surrounding the banking market in general, while still allowing E&Ps to maintain robust capital spending programs.

"Since bonds are typically less restrictive than credit facilities, bond issuance has given many E&Ps more breathing room in terms of covenant pressures and borrowing base redeterminations (for most high-yield companies)."

The report, "Crude and NGL Prices Give Independent E&Ps Relief from Natural Gas Doldrums," is available at