The global integrated oil and natural gas industry will suffer through a “slow and painful” economic recovery in 2010, with worldwide demand lower at a time when inventories are near record highs, Moody’s Investors Service reported Thursday.

Overall, gross cash flow for the integrated companies is forecast to fall in 2009 by almost 40% to $180 billion “and will remain at lower levels in 2010, amid declining prices for crude oil and natural gas,” said Moody’s analysts in a review of the global integrated energy industry.

“The negative outlook reflects our view that prices for crude oil and natural gas could turn lower, squeezing margins and causing cash flow for integrated oil companies to fall by more than a third in the year ahead,” said Moody’s Senior Vice President Thomas Coleman.

In the short term the global economic malaise will negatively impact energy prices and the reduced cash flow profiles of the major integrated oil companies, said Moody’s analysts. Longer term, “the industry will likely continue to struggle with reserve replacement, production growth and political risks.”

However, even with cash flows pressured and financial leverage on the rise, the ratings agency sees no threat to the “superior capital resources and strong credit profiles” of the major integrated companies.

“In addition, inflated costs are beginning to decline, providing some relief to cost structures and operating margins of the integrated oil companies,” said Moody’s Senior Credit Officer Francois Lauras.

The downturn in demand and pricing may not affect capital spending across the board, said the analysts. Capital expenditures are forecast to “hold relatively steady” because of large multi-year developments and higher embedded costs.

“As a lower-price outlook takes hold, the large free cash flow of recent years will decline and turn negative for most companies,” analysts noted. “Higher-cost and early-stage investments could be delayed, and some projects may be deferred as the industry waits for costs to come down.”

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