Moody's Investors Service, the credit rating agency, is taking a rosier view of business prospects for multinational oil companies amid forecasts of a recovery in global oil demand. But gaining access to new resources will continue to challenge international oil companies, Moody's warned in a recent report.
In what amounts to a cautious vote of confidence from its analysts, the agency has revised its outlook for the global integrated oil and gas industry to stable from negative. "Profitability and cash-flow generation across the sector has now bottomed out, helped by the recent recovery in oil prices and an easing in industry costs," Moody's said. Crude prices of about US$75 a barrel in the next year should support improved profits from oil production, offsetting negative effects from weak gas prices and squeezed oil refining margins, it predicted.
The major oil companies would also benefit from deflated costs and were expected to help themselves with "a renewed focus on cost efficiency". "We believe that the incumbents' ongoing efforts to cut costs to lower the cash break-even points of their operations, together with higher oil realisations, should support free cash-flow generation in 2010," Moody's said. "This should help stem the recent increase in debt."
The sector will, however, continue to face formidable difficulties. "We expect the refining sector to remain under pressure," Moody's predicted. "The integrated majors face increasing competition from national oil companies such as China's state-owned energy groups, which are keen to ensure the energy security of their resource-hungry economy while satisfying their own growth aspirations. "Despite the change in market environment of the past year, the integrated majors continue to face pressures arising from resource nationalism, as oil-rich host countries such as Brazil, Nigeria or Libya consider unfavourable changes in fiscal and regulatory regimes."
Moody's noted that international oil companies had scored some major exploration successes last year, mainly in the Gulf of Mexico and off the coasts of Brazil and West Africa. "The size of the oil reserves seated in the deep waters of the Gulf of Mexico may be considerably larger than previously estimated," it said. Reserve estimates that were higher than expected for the Guara field in Brazil highlighted the country's oil potential, and a new oil exploration frontier off the coasts of Ghana and Sierra Leone was looking increasingly attractive.
Yet oil companies might not reap big rewards from their recent discoveries. The Brazilian government was discussing a new legal framework aimed at maximising benefits to its people from oil development, while limiting foreign oil producers' revenue. Some African governments were moving in the same direction, Moody's said. The agency also outlined a "macro-stress scenario" for the industry, under which oil prices would average only $50 a barrel next year while major economies stagnated.
Under those conditions, oil company profits would cease to improve and corporate debt would rise. "There is a real risk of this happening," Moody's said. "But it is too early to adopt this scenario as our base case, because it is too early to tell whether fiscal and monetary stimulus policies are working." The agency said it would continue to monitor energy market dynamics in the context of the global economy and watch how oil companies responded to any renewed oil price weakness.