Lower earnings for global integrated O&G sector next year, says Moody’s

Ebitda for the integrated O&G segment are projected to fall slightly in 2019 after rising approximately 30% in 2018 on higher oil prices


The global integrated oil and gas (O&G) providers are expected to post lower earnings in 2019 after a double-digit growth in 2018 but the sector’s outlook remains stable, said credit rating firm Moody’s Investors Service Inc.

The rating agency said earnings before interest, tax, depreciation and amortisation (Ebitda) for the integrated O&G segment are projected to fall slightly next year after rising approximately 30% in 2018, boosted by higher oil prices, Moody’s said in its 2019 outlook on the O&G industry.

The segment would continue to be stable on lower Ebitda projections, more shareholder-friendly financial policies, and increasing focus on investments to help increase production.

The outlook for the exploration and production (E&P), oilfield services and drilling, midstream and master limited partnerships, and refining and marketing sectors is projected to be positive with Ebitda growth of between 8% and 15% next year.

But the rating agency said the O&G industry would face volatile but rangebound oil and natural gas prices, E&P companies struggling to improve shareholder returns, and lower differentials as infrastructure comes on line.

“Consolidation will accelerate among upstream and midstream shale companies, midstream credit quality will finally improve, and oilfield services will grind forward slowly from weak levels,” Moody’s said.

The International Maritime Organisation’s (IMO) worldwide 0.5% fuel sulphur content cap regulation, which will be enforced from 2020 (IMO 2020), will dominate the refining sector.

Mexico and Brazil will face significant uncertainty under new administrations, while Asian national oil companies will face dilemmas over investment plans amid volatile oil prices.

“Oil prices will settle into the US$50 (RM210) to US$70 range through 2020, with volatility. We see the price of the marginal barrel at around US$55 to US$60 per barrel, which anchors our price range,” the rating agency said.

The recent volatility in oil prices reflects concerns of a weakening global economy, higher Saudi Arabia and Russian production, demand destruction tied to the strong US dollar and trade tariffs, mixed signals on Iran sanctions, and financial speculation.

However, the announced production cuts by the OPEC and Russia will contribute to a more balanced global supply and demand, while helping to stabilise oil prices.

Natural gas prices are set to stay largely within the US$2.50 to US$3.50 range in 2020 on strong supplies, while the below-average storage levels could push prices to higher levels based on unexpected winter weather events.

Moody’s said enormous reserves provide economic returns for many producers at US$3 per one million British thermal units and below.

Significant associated gas from shale drilling will add to the supply, while new pipeline infrastructure will enhance gas transport, helping to reduce locational basis.

US liquefied natural gas exports, gas-fired power demand and Gulf Coast petrochemical plants aid demand as well.

For the Asia-Pacific region, credit metrics of national O&G companies will remain strong next year on healthy upstream earnings, cost discipline and large liquidity buffers.

Refiners’ earnings will contract marginally on higher regional feedstock cost and retail fuel price regulation, although refiners could benefit in late 2019 from the implementation of IMO 2020.

Singapore’s complex refining margin will stay benign at US$5.50 per barrel, while the reintroduction of fuel subsidies in India and Indonesia will squeeze marketing margins that could extend to other markets.

Companies will continue large investment cycles in refining capacity and upstream production to support fuel demand growth, while increasing shareholder returns pose risks for national oil companies.