Oil and gas in­dus­try to cut spend­ing in 2016 amid con­tin­ued com­mod­ity price weak­ness

Financial Mirror (Cyprus) - - FRONT PAGE -

As com­mod­ity prices con­tinue to slide, the global oil and gas in­dus­try will re­duce cap­i­tal spend­ing and work to­ward leaner bud­gets in 2016, says Moody’s In­vestors Ser­vice.

“Ex­cess sup­ply will con­tinue to drag on com­mod­ity prices in 2016 in the global oil mar­kets and the US nat­u­ral gas mar­ket,” said Steven Wood, a Moody’s Man­ag­ing Di­rec­tor. “Fur­ther­more, the po­ten­tial lifting of sanc­tions against Iran could bring even more sup­ply to the mar­ket in 2016, off­set­ting any ex­pected de­clines in US pro­duc­tion.”

Low com­mod­ity prices have led to a de­te­ri­o­ra­tion in cash flows and liq­uid­ity, strain­ing the al­ready lim­ited fi­nan­cial flex­i­bil­ity of spec­u­la­tive-grade oil and gas com­pa­nies. Even large, di­ver­si­fied in­vest­ment-grade com­pa­nies will strug­gle with di­min­ish­ing fi­nan­cial in­creas­ing fi­nan­cial lever­age.

Moody’s expects up­stream cap­i­tal spend­ing to drop by at least 20%-25%, leav­ing the oil­field ser­vices and drilling in­dus­try the most stressed sec­tor in 2016. In­te­grated and na­tional oil com­pa­nies will cut cap­i­tal spend­ing and thus lower cap­i­tal bud­gets in 2016, but oil­field ser­vices and drilling com­pa­nies in par­tic­u­lar will

flex­i­bil­ity

and em­pha­size cost re­duc­tion as they ad­just to re­duced de­mand.

Over­all, the oil and gas sec­tor will likely see a rise in dis­tressed ex­changes and de­faults in 2016, ac­cord­ing to the re­port.

“As a re­sult of de­te­ri­o­rat­ing cash flows and credit in­vestors in­creas­ingly avoid­ing the strug­gling en­ergy sec­tor, Latin Amer­i­can na­tional oil com­pa­nies will face high re­fi­nanc­ing risk,” added Nymia Almeida, a Moody’s Se­nior Credit Of­fi­cer. “On top of sig­nif­i­cant ma­tu­ri­ties due in 2016-17 for Mex­ico’s PE­MEX, Brazil’s Petro­bras and Venezuela’s PDVSA, cur­rency de­val­u­a­tions will raise im­port costs, cap­i­tal spend­ing and in­ter­est pay­ments.”

Credit met­rics will also con­tinue de­te­ri­o­rat­ing for China’s three na­tional oil com­pa­nies — China Na­tional Petroleum Cor­po­ra­tion (Aa3 stable), China Petro­chem­i­cal Cor­po­ra­tion (Aa3 stable) and China Na­tional Off­shore Oil Cor­po­ra­tion (Aa3 stable) — through at least 2017.

Fur­ther­more, Rus­sia’s weak rou­ble will help the coun­try’s na­tional oil com­pa­nies with­stand low oil prices, but eco­nomic sanc­tions limit ac­cess to long-term ex­ter­nal fi­nanc­ing from US and EU fi­nan­cial and cap­i­tal mar­kets for the Rus­sian gi­ant Ros­neft (Ba1 stable).

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