WTI and Henry

The market disruption from Covid-19 is forecast to unsettle long-term energy consumption patterns and heighten price volatility, with better financed operators ready to pounce on distressed Lower 48 assets, according to Moody’s Investors Service.

An extended oil price slump partly sparked by the pandemic, “will amplify disparities between stronger and weaker” exploration and production (E&P) companies. The well capitalized operators, along with the global majors, “will consolidate U.S. shale assets,” credit ratings analysts said. 

The “universe of leveraged E&P companies will shrink substantially amid waning bank and investor support as a prolonged downturn further discourages debt investors from the E&P sector.” 

Disparities between the E&P “haves and havenots” are amplified by the pandemic.

“All E&Ps are expected to take a hit on output and cash flow” into next year. However, E&Ps that were operating with higher costs and leverage before the coronavirus downturn “will shrink considerably, starved for capital, lacking access to market, and will face increasing restructuring risk as hedges and liquidity run out.”

More than half (52%) of the E&Ps rated by Moody’s have a “negative” outlook today “reflecting elevated liquidity and solvency risks.”

The “growth-at-any-cost business model” by the traditional E&Ps “has proved unsustainable in recent years.” In addition, the push toward decarbonization around the globe “has left some market participants uneasy over oil’s long-term sustainability.”

E&Ps had sold capital inflows between 2010 and 2014, but since then, debt investors have cut their exposures to operators that long have lost money.

Rebalancing the global oil market, meanwhile, is going to require E&Ps to remain disciplined “for at least two years to ensure that demand recovers more quickly than supply,” the analysts said. The natural gas market’s recovery also is forecast to take time, although the overall impacts may be less severe than for oil. 

“The U.S. natural gas market will benefit from slower growth in oil production — and by extension less associated gas production in 2020-21,” the Moody’s team said. “But oversupplied global markets for liquefied natural gas will hamper growth in U.S. natural gas exports in the medium term, and will slow the construction of new export facilities.” 

Overall, oil and gas prices are likely to remain volatile because of the ongoing adjustment in supply and the significant inventory overhang.

“We expect that oil prices will remain highly volatile but will recover toward our medium-term price range of $45-65/bbl,” the credit ratings analysts said. “We expect that natural gas prices will recover to our medium-term price range of $2.00-3.00/MMBtu.”

Investment activity is likely to rebound from 2020 lows but remain muted because of the higher cost of capital and uncertainty about the pace and trajectory of demand growth.

Meanwhile, decreasing oil and natural gas volumes may lead to an inflection point in the cash flow for the midstream sector, as E&P customers cut capital spending and renew or renegotiate contracts. 

“Rising regulatory scrutiny will make it harder to win social licenses to build interstate pipelines and other large projects, slowing investment, and companies will increasingly need to finance themselves as capital access tightens,” the analysts said. 

The demand and cash flow deterioration seen in the first half of this year also imply “significant trouble” for the global oilfield services (OFS) sector. 

“While the handful of investment-grade OFS majors can weather some prolonged industry stress, most speculative-grade OFS companies face an extreme liquidity crunch.”