The outlook for global oil and gas industry is stable thanks to recent rally in crude oil prices compared to the lows experienced in the beginning of 2009, according to Fitch Ratings.

The Fitch Report, ‘Oil & Gas 2010 Outlook: Exposure to Deflation
Remains In their ‘ 2010′ said credit profiles across the oil & gas
sector are expected to be largely in-line with 2009 levels, with
exceptions for the refining and drilling and service sectors. The key
risk for upstream companies and integrateds relates to the potential
for weaker oil prices during the year.

Fitch sees reasons to believe the current run in crude prices may not
be fully based on fundamental factors, exposing the sector to changes
in monetary and fiscal policy and modified inflation expectations in
2010. As a result, should global economies and/or the appetite for oil
as an inflation hedge weaken in 2010, oil prices could fall
dramatically leading to further downside potential for the sector.

As noted, Fitch’s stable outlook is not uniform across all sectors and
credits within the oil & gas industry. In general, upstream, oil
focused companies should see improved cash flows and credit metrics
during the year stemming from higher oil prices. Natural gas prices are
expected to remain weak which could result in weaker credit profiles
for companies focused on natural gas related drilling. However, the
refining sector remains under the most pressure as a result of
continued low utilization rates, weak margins and continued falling
end-user demand.

While the drilling and services sector is expected to weaken modestly,
contract backlogs and the run in oil prices are expected to continue
supporting activity levels and credit profiles of these firms. Merger
& acquisition (M&A) event risk continues to be a concern,
although high oil prices and strong 2010-2011 futures prices for
natural gas have mitigated activity to-date. Offshore drilling
companies continue to look to the current downturn as an opportunity to
expand fleets. Weak refining conditions have resulted in significantly
reduced prices for refining assets leading to potential risks for
bondholders across the sector. Fitch would note that event risk remains
issuer-specific.

Summary of Sector Outlooks:

–North American Integrateds: Credit quality for the large, integrated
oil companies is expected to remain robust as these firms benefit from
oil-heavy upstream portfolios, sizable cash balances and still low net
debt levels. Across all the sectors in the energy space, integrated oil
has generally been the least impacted by volatile commodity prices, due
to its high credit quality, significant headroom to absorb incremental
leverage, and willingness to take a longer, ‘through the cycle’ view on
reinvesting in the space. The decoupling of oil and natural gas pricing
is expected to continue to benefit integrated firms in the near-term
but also leave cash flows reliant on the continued strength of oil
prices.

–European Integrateds: The creditworthiness of European integrated oil
majors is supported by their ability to generate positive free cash
flow (FCF) through the business cycle, strong oil markets, recovery
expectations in 2010 and continued benefits from lower industry-wide
operating costs. While credit profiles did weaken during 2009 resulting
in all of the European Majors to return to the bond markets to meet
capex and dividend outflows, Fitch expects improved industry conditions
in 2010/2011 to support a return to their ability to internally fund
capital expenditures.

–Russian Integrateds: The Russian oil industry continues to face
significant challenges as the industry deals with a rapid slowdown in
production growth. Higher oil prices are expected to reverse the trend
in 2009 of capex cuts, although budgets have been slow to increase.
Governmental policies continue to be accommodative; however, there is a
risk in 2010 that economic growth could lead to scaled concessions for
the industry in an effort to improve the country’s federal budget
deficit.

–Latin American Integrateds: The Latin American oil and gas sector is
dominated by national oil companies (NOCs), many of which are highly
linked to the sovereign ratings. As a result, the key risks for the
stability of the ratings of Latin American oil and gas companies will
be the impact of the global recession on the Latin American sovereigns
as well at the price for crude oil and natural gas. Improved oil prices
in 2010 should increase FCF generation and also decrease political
intervention risk in the region. The sector continues to benefit from
improved capital markets access both domestically and internationally
and saw record issuances in 2009 resulting in strong liquidity for most
companies.

–N.A. Independent E&P: Credit quality for North American
independent exploration and production (E&P) companies is expected
to stabilize at levels consistent with 2009 levels. While higher oil
prices continue to support the industry, this group remains more
heavily exposed to U.S. natural gas prices which are expected to remain
weak in 2010. E&P firms should continue to benefit from lower costs
and more flexible capital expenditure budgets resulting in neutral to
modestly positive FCFs. Increased hedging should reduce cash flow
volatility for many of the firms in the sector and proceeds from asset
sales should allow for some de-leveraging during the year.

–Drilling and Service Companies: The drilling and service sectors
outlook remains weak for 2010. Credit quality is supported by sizable
contract revenue backlogs, reduced capital expenditures and lower costs
stemming from restructuring efforts. Additionally, industry activity
levels will benefit from strong oil prices and contango futures market
prices. Asset quality will continue to be a key differentiator in 2010
and M&A risk for the offshore drilling sector remains high.

–Downstream: Refining continues to be the worst-performing subsector
in energy, with an unfavorable supply/demand balance, low plant
utilization, and rising competition from renewables all pressuring key
credit protections. Currently, most refiners rated by Fitch have
Negative Outlooks.

Fitch anticipates that sector credit metrics may bottom out at levels
worse than those seen during the last industry downturn (2002), and
could remain depressed for an extended period, given high U.S.
unemployment and the potential for a slow economic recovery. Event risk
is also fairly high for the sector. Fitch notes that while refiners as
a group have responded vigorously and early to the downturn by paring
back operating costs, cutting shareholder distributions, eliminating
non-critical capex, and shuttering some capacity there may be
relatively little left to cut in the system at this point in the event
of another leg down in industry demand.

Source: Commodity Online, Businesswire

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