Sharply higher prices for oil and natural gas liquids (NGLs) have boosted business conditions for the independent exploration and production (E&P) industry, and should remain high well into 2012, offsetting persistently weak natural gas prices, according to Moody’s.
Companies that focus on oil and NGL production are poised to see particular benefits through 2012 - even as a shale-based supply glut continues to depress natural gas prices in North America, Moody’s says in its new industry outlook for the E&P sector. Oil- or NGL-focused producers such as Nexen (NXY), Whiting Petroleum (WLL) and Continental Resources (CLR) will benefit from these high prices through mid-2012. By contrast, natural gas-oriented E&Ps such as EnCana (ECA), EQT (EQT), Southwestern Energy (SWN) and QEP (QEP) could face some margin pressure.
"The independent E&P industry is now in the midst of one of its most advantageous stretches in recent years, with oil offsetting weak natural gas prices and outpacing the rising costs of oilfield services and other expenses." - Terry Marshall, Moody’s
E&Ps have seen oil prices at historically high levels in recent months, due in part to political unrest in the Middle East and North Africa. Moody’s expects these prices to remain high through 2012. By early 2011, North American oil rig counts had reached their highest levels in 25 years as E&Ps raced to boost production of high-priced crude and NGLs.
In their rush to boost production, many E&Ps are spending beyond their cash flow, the report says. Some are raising new capital by pursuing joint ventures, while others are tapping the debt markets for funding.
Natural gas prices will remain depressed over the near term, with new technologies increasing production and reserves in North America, resulting in a significant supply glut.
Moody’s recently revised its outlook for the global independent exploration and production sector to positive from stable, reflecting the ratings agency’s expectations for high oil and NGL prices well into 2012, offsetting persistent weak natural gas prices. A collapse in oil prices could bring the outlook back to stable - or even negative, in the case of a swift and severe drop.