Strong cash this year will give the U.S. upstream oil and natural gas sector more wiggle room to increase their capital budgets, to strengthen the bottom line and to give shareholders bigger dividends, Fitch Ratings analysts said in a new report.

Overall, the financial performance for the U.S. upstream will remain positive in 2005 because of higher crude and gas prices, said the 13-page report. Capital spending also is expected to be above 2004 levels, driven by increased oil field services and higher steel prices.

“Capital budgets…will be driven by organic growth capital, as many North American independents still have a sizable portfolio of drilling prospects from acquisitions completed over the past couple years. Fitch predicts that the super-majors will be disciplined in their capital spending, continuing to return most excess cash to shareholders, primarily in the form of stock repurchases.”

Robust demand, combined with speculation over global crude oil supplies, will continue to drive prices this year, the report said. And, despite the lingering effects of Hurricane Ivan on Gulf of Mexico production, “domestic natural gas inventories are full going into the winter season.” Beyond the winter heating season, Fitch expects weather and the price of oil to continue to dictate gas price strength.

“Meanwhile, industrial demand destruction will continue to be the main balancing mechanism for supply and demand as supply can only be expected to be stagnant at best. As a result of the concerns regarding production, we believe that prices will continue to range between $4 and $7/Mcf over the next few years until enough significant greenfield liquefied natural gas (LNG) capacity is built to help offset weakness in U.S. production.”

Because of the long lead times to permit and build new LNG plants, Fitch does not expect new LNG capacity to have a major impact until around 2008 or later. “After this time, we expect natural gas prices to average $3.50/Mcf.” Fitch, which is maintaining a conservative outlook, set its outlook for natural gas prices this year at $5/Mcf, and for 2006, $4.50/Mcf based on Henry Hub prices.

Industry cash flows for the upstream likely will be directed toward dividend increases and stock repurchases and “not used for debt reduction since most companies already are at their targeted capital structure,” said analysts. “Nevertheless, companies who remain focused on long-term balance sheet improvement will find that 2005 will provide the opportunity to achieve rating upgrades.”

Fitch’s outlook for the oil services industry also is positive, based on its expectations for increased capital budgets for independent producers and national oil companies. However, the analysts are taking a more cautious approach on the refining sector, expecting a “choppy stream of transactions to occur, albeit at a lower pace than recent years due to the limited number of buyers. ”

The report is available on the Fitch Rating web site at www.fitchratings.com.

©Copyright 2005 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.