In a special energy report FitchRatings this week cut the price deck for 2010 U.S. natural gas by $1/Mcf in response to expectations for modest economic growth in the coming year.
The credit rating firm’s 2010 base case price deck for natural gas now is $4.00/Mcf at the Henry Hub, down from an earlier forecast of $5.00. The crude oil price was lifted to $70/bbl (West Texas Intermediate) from $57.50 representing “expectations of stable demand,” Fitch analysts said.
“The revision to our U.S. natural gas price deck represents continued supply/demand imbalances stemming from rising supply from U.S. shale plays and increased LNG [liquefied natural gas] liquefaction capacity,” said the Fitch team. “While improved economic conditions should support demand for the commodity, Fitch does not currently expect demand increases to materially tighten enough to support prices during 2010.”
Fitch’s “stress case” price deck for 2010 is $3.50/Mcf for gas and $50/bbl for oil, which represents “reduced inflationary concerns and the potential for a ‘double-dip’ global recession.”
Oil is expected to continue trading at a premium to U.S. natural gas in 2010 and 2011 relative to historical levels because of growth outside the United States, said the analysts.
Fitch’s price deck is used primarily for modeling and rating purposes and tends to be conservative, but “it also represents our belief that prices will ultimately revert to levels driven by long-term fundamentals,” said the analysts.
The credit quality in 2010 for North American independent exploration and production (E&P) companies is expected to stabilize as a group, the Fitch team said. E&P company credit profiles have been supported by “significant capital expenditure reductions” this year, and as long-term contracts for drilling and services continue to reset at reduced pricing levels, independents are expected to benefit from declining costs, which would result in better operating margins and lower capital spending for equivalent activity levels.
In addition, said the analysts, stronger commodity prices in the futures market have resulted in increased hedging activity at “attractive prices. This is expected to improve cash flow levels in 2010 and reduce earnings volatility for most companies should prices move dramatically lower during the year.”
The independents “continue to have better organic investment opportunities, and as a result, Fitch expects them to continue to use cash flows for internal development and production-related projects” instead of growth-oriented mergers and acquisitions or “aggressive” leasehold acquisition programs.
“Most independents are expected to continue to live within internally generated cash flows during 2010, and as a result, reserve and production growth levels should remain well below levels seen since 2004.”
For North America’s integrated producers, credit quality remains “relatively strong” going into the new year because of the subsector’s exposure to crude “or in the as of LNG export facilities, oil-linked pricing mechanisms…”
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