Stable outlook for global integrated oil industry

The outlook for the global integrated oil industry is stable, despite the recent steep decline in energy prices caused by worsening global economic conditions and weakening demand, Moody's Investors Service said in a new report.
Strong results in the first nine months of 2008 amid high oil and gas realisations have underpinned financial profiles across the sector, which should leave the incumbents' credit metrics well positioned relative to their respective ratings.
"Moody's recognises that the effects of the financial turmoil have spread to the real economy, leading to a slowdown in activity that has translated into decreasing demand for oil products across the OECD economies," said Francois Lauras, Vice President-Senior Credit Officer in Moody's Corporate Finance Group. Indeed, in Q3 2008, US oil consumption shrank by about 1 million barrels per day (bpd), or 5% less than in Q3 2007. "However, the fall in the price of oil, prompted by weakening demand conditions, should be somewhat tempered by production cuts from OPEC, which controls 40% of the global oil supply," explained Lauras.
Moody's notes that the fall in oil prices will likely lead to project delays and deferrals, despite expectations of cost deflation. "While most of the projects that have already been sanctioned are expected to go ahead, future final investment decisions are likely to be at risk and will depend on how economic conditions and oil prices evolve over the coming months," said Moody's Senior Vice President Tom Coleman.
However, Moody's believes the current market turmoil may trigger a new round of M&A activity. Indeed, as many of the larger integrated companies have experienced flat to negative production growth over the past few years, many are pressured to deliver organic growth. Thus, these large companies could take advantage of the financial woes currently afflicting smaller E&P players, resulting in increased M&A activity in the sector.
"Moody's notes that the financial flexibility of many majors is underpinned by their favoured access to capital markets, as illustrated by recent new bond issuance, complemented in some cases by fairly large liquid funds held on balance sheet," said Coleman.
Moody's believes that the major players generally enjoy robust balance sheets and a solid base of mature cash generating assets, despite the current economic slowdown and its effects on the industry. These factors, along with highly discretionary shareholder rewards, give them the flexibility to withstand a period of lower oil prices at the current rating levels and are reflected in the stable outlook that Moody's maintains for the sector.