Moody’s: Oil, gas industry to continue recovery in 2018

The oil and gas industry will continue its slow recovery as upstream companies increase production, helping the midstream and services businesses as well, according to Moody’s 2018 outlook.

Excess supply will continue to dampen oil prices in the coming year. Natural gas prices, on the other hand, will benefit from higher demand, but price gains will still be limited.

“Prolonged oversupply will constrain oil prices in the next 1-2 years, though [Organization of Petroleum Exporting Countries]-led production cuts have now stabilized around price-supportive levels,” said Steve Wood, Moody’s managing director for oil and gas. “We expect prices to remain within the $40-60/bbl band through 2019, assuming continued compliance with global production targets.”

Moody’s outlook is stable for the integrated oil and gas business over the next 12-18 months. Earnings will rise about 5% even as conditions remain strained as companies seek greater returns on upstream investments. A return to positive free cash flow could compel major European companies to reinstate cash dividends.

Moody’s outlook for the E&P business remains positive, with earnings likely to rise more than 10% in 2018 amid increasing production volumes, helped by modestly higher capital spending. Service-cost inflation, though currently contained, could rise in certain markets.

The outlook for drilling and oil field services companies is also positive, with earnings likely to rise 10-12% as upstream capital spending and the global rig count continue to increase. But the positive outlook represents an improvement for a sector that remains very weak rather than a return to full health. North American land markets will have the best margin opportunities while segments related to well completion will see the largest year-on-year price increases. Offshore markets, however, will have another weak year.

Moody’s outlook for the midstream segment is positive as well, with earnings likely to increase 8-10% in 2018. Both upstream capital spending and production will increase. While the US federal regulatory climate supports the midstream segment, state and local regulations are likely to continue to pose hurdles.

Meanwhile, the outlook for the refining and marketing sector is stable, with earnings likely to increase 5-7% in 2018. Demand for distillates will remain strong, helping to ease high inventory levels, and Middle Eastern fuels will gradually displace European products.