Moody’s outlook stable for global integrated oil industry

Credit conditions in the global integrated oil industry will be stable over the next 12 to 18 months, according to Moody's Investors Service.
"We do not expect significant credit rating changes in the integrated oil sector," said Moody's Senior Vice President Tom Coleman. "With debt balances at a cyclical low and cash positions at high levels, most of the companies are already highly rated."
The stable outlook reflects the rating agency's expectation that issuers in the sector will continue to generate strong free cash flow and maintain relatively modest financial leverage, even if oil and natural gas prices retreat from recent high trading ranges.
While the industry has a very strong financial profile, the challenges of replacing reserves, increasing production, controlling costs and mitigating political risks temper the outlook, Moody's said.
"Record oil and natural gas prices are driving significant free cash flow, supporting already low leverage positions and ample financial flexibility for integrated oil majors," said Moody's Vice President and Senior Credit Officer Francois Lauras
"However, reserve replacement and production growth are sub-par, reflecting reserves access issues, under-investment, and a focus on shareholder returns."
Rising industry costs are a concern, but they are mitigated by high prices and strong cash returns, and are unlikely to derail capital spending and major projects, Moody's said.
Due to political difficulties in gaining access to new oil finds, the technical complexity of reaching some untapped reserves, and the maturing of existing fields, oil companies are having trouble replacing their reserves and production levels are flat-to-declining.
"Governments have restricted access to the most attractive hydrocarbon resources and the companies must cope with fiscal terms from production-sharing partners that become less favorable as prices rise," Lauras said.
Capital spending by the majors is up, reflecting both new projects and industry cost inflation. But with more limited reinvestment opportunities, companies continue to direct substantial free cash flow to shareholders through dividends and share repurchases.