Global energy company earnings, which surged on stronger oil and natural gas prices, should ease in 2023 as the industry adjusts to slower demand growth and an economic slowdown, according to Moody’s Investors Service.
“The pace of improvement in fundamental industry conditions will also decelerate after a strong post-lockdown rebound in earnings and credit quality during 2021-2022,” according to the credit ratings team led by Elena Nadtotchi, senior vice president.
“Industry earnings will stabilize overall in 2023, but will still reach levels close to recent peaks,” Nadtotchi said. Commodity prices have declined from the high levels seen earlier this year, and are “likely to remain cyclically strong through 2023, which combined with modest growth in volumes will support strong cash flow generation for oil and gas producers.”
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More analysts in the coming months are expected to weigh in on forecasts for 2023. For now, the Moody’s team said exploration and production (E&P) companies may keep their investments restrained amid uncertainty about supply and demand trends.
Still, there is a “high geopolitical risk premium,” which “will continue to support oil prices at levels well exceeding our medium-term oil price range of $50-70/bbl,” Nadtotchi said.
Natural Gas Market Dislocations?
Global natural gas market dislocations also are likely to continue, with North American prices “much higher” than Moody’s medium-term Henry Hub price in 2023 of $2.50-3.50/MMBtu, analysts said.
U.S. LNG export demand should remain strong, too, with liquefied natural spot prices in Europe and Asia boosting domestic prices.
However, E&Ps may experience “softening commodity prices and limited growth in production volumes” in the coming year.
“U.S. average oil production volumes are unlikely to reach their recent 2019 peak in 2023, even with run rate production of nearly 12 million boe/d as of the third quarter…just below 12.9 million boe/d reported in November 2019,” Nadtotchi said. As cash flow declines, the E&Ps may not accelerate growth investments.
“In 2022, U.S. capital spending increased by about 25%, yet the level of investment remains well below historical averages, while inflation for costs and labor, rather than expansionary activities, accounts for some of the increase in capital spending,” said the analyst team.
Shareholder returns, however, should continue to rise, further limiting capital allocation to growth.
Profits for the energy majors in the year to come also should “decline moderately.” The integrated E&Ps’ capital spending is forecast to remain below pre-Covid levels (pre 2020) through 2023.
The majors can expect “high cost inflation for raw materials, rig rates and crews” that could consume “some of the sector’s modestly higher capital budgets.” Still, the group overall is accelerating their sanctioned upstream projects and some brownfield projects with “short-return cycles, while beefing up spending in renewables, hydrogen and other projects to reduce carbon emissions.”
Meanwhile, rising demand for oilfield services (OFS), as drilling and completion activity improves, is likely to increase “pricing power and…support material growth,” according to analysts.
“The tight U.S. and international markets for OFS equipment and services should allow OFS companies to raise prices to offset cost inflation and achieve adequate returns on invested capital,” according to Moody’s. “Dayrates for onshore and offshore rigs have improved in 2022, and OFS companies will implement higher rates as customers renew contracts.”
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