Oil and natural gas drillers may have weathered the worst of the slump.
This year’s uptick in prices, along with companies’ increased efficiency, led Moody’s Investors Service to raise its global outlook for integrated and independent oil and gas producers to stable from negative for the first time in nearly two years. Producers seem to have hit a bottom, said Steven Wood, managing director for the energy team at the rating agency.
“The industry still is in a lot of trouble,” Wood said last week. But “it doesn’t feel at this point like it’s getting worse.”
The two-year slump in crude prices has led producers to post consecutive losses, slash jobs and cut capital spending by as much as 75%. While still below $50 a barrel, New York-traded oil futures have rebounded by almost 70% from a 12-year low in February.
Heading into 2017, producers’ costs are likely to plateau with further reductions from supply-chain management and selective drilling, Moody’s said. Consolidation and an increase in deals is likely to come as commodity prices continue to recover.
Thus far, much of the deals activity has stemmed from asset sales by companies seeking to simplify their portfolios and focus on the most economic acreage. Anadarko Petroleum Corp and Devon Energy Corp have both targeted or achieved proceeds upwards of $3bn.
Meanwhile, integrated companies that also own refineries and distribution assets are likely to see production growth and should be able to generate positive earnings at current prices, Moody’s said. A longer-term challenge is delivering profitable growth in production beyond 2020, given the deep spending cuts, Wood said.
“That works in the short run,” Wood said. “That’s going to affect them further down the road.”