Moody's: Earnings growth shifts down a gear turning outlook on global oil & gas sector stable

Moody's: Earnings growth shifts down a gear turning outlook on global oil & gas sector stable
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KUALA LUMPUR (Sept 26): An expected slowdown in the pace of earnings growth has moved the 2018 outlook on the global integrated oil and gas industry to stable from positive, according to Moody's Investors Service.

In a report titled “"Integrated oil and gas -- Global: Outlook turns stable amid expectations of slower EBITDA growth in 2018” published yesterday, Moody’s said the slowdown follows a strong earnings recovery in 2017 and signals a return to stable, organic growth.

A Moody’s vice president and senior credit officer, Elena Nadtotchi said the rating agency’s outlook has turned stable to reflect the increased likelihood of earnings growth slowing down for the global oil and gas players in 2018, after the sharp recovery in 2017.

“We also expect fundamental conditions to stabilize further as companies have cut their production costs and capital investment amid low oil prices," said Nadtotchi.

She said Moody's expects EBITDA growth for the global oil and gas sector to slow to around mid-single digits in 2018 from 28% for the 12-months to 30 June 2017.

“Strong growth in production volumes, accelerated cost cuts and modest oil price recovery drove the latter, supporting a strong recovery in credit metrics in 2017. Most gains from cost cutting have now been realised,” said Nadtotchi.

Moody’s report said companies are taking steps to improve returns on investment in upstream operations and continue to invest in selected new projects and prioritise further reduction in finding and development costs.

“Royal Dutch Shell Plc (Shell, Aa2 stable), BP p.l.c. (A1 positive), Chevron Corporation (Aa2 stable) and Exxon Mobil Corporation (ExxonMobil, Aaa stable) will benefit from their access to long-term, large-scale, low-cost reserves.

“Companies will accelerate portfolio pruning with the oil price around $50/ bbl. Royal Dutch Shell and ENI S.p.A. (Baa1 stable) have speeded up divestments of assets in 2017,” it said.

Moody's expects more divestments and acquisitions of assets in the sector in 2018, as companies focus their upstream portfolios on higher-margin, growth assets and on securing long-term strategic assets.

The ratings agency said the sector's return to positive free cash flow generation in 2017 will boost the capacity of European majors to reinstate full cash dividends over the next 12-18 months.

While higher shareholders returns would put a brake on further improvement in credit metric in 2018, the companies can maintain their recovered credit profiles, it said.