Moody’s cuts oil industry outlook to negative

Moody's Investors Service has lowered changed its Industry Sector Outlook for the global integrated oil and gas industry to ‘negative’ from ‘stable’.
This change in outlook reflects Moody's view that weaker crude oil and refined product demand in the wake of the severe global economic downturn is likely to prevent any meaningful uplift in oil prices in the near term despite the significant cuts in production initiated by OPEC in recent months.
Product demand in the U.S. and other major consuming markets and the slowdown in growing economies such as China will continue to exert a downward pull on prices and integrated company earnings and cash flow through 2009 at least. These constraints are compounded by a continuing lag in the adjustment of the industry's operating and capital costs to the lower oil price environment, although there are signs that cost structures and inflationary pressures are beginning to adjust.
"In this context, the integrated majors generally display strong financial positions, which provide some flexibility to weather a period of oil price weakness" said Francois Lauras, Vice President-Senior Credit Officer in Moody's Corporate Finance Group.
Moody's also cautions that the maintenance of capital expenditures and dividend pay-outs in line with recent levels is likely to reduce current headroom within individual company ratings in the absence of any sustained rebound in prices or material adjustment to the industry's cost structure and share repurchase activity, which ramped up during 2005-2008, a period of more abundant free cash flow. While likely to adjust downward over time, capital spending does not respond as quickly to price declines, given the large multi-year spending commitments inherent in many of the majors' upstream and downstream programmes already underway. These are considerations that Moody's continues to monitor in the context of our individual issuer ratings and outlooks.