Possible Reversal of Overinflated Oil Prices Poses Risk to Oil & Gas Sector in 2010
Fitch Ratings’ 2010 outlook for the global oil & gas is stable as the rally in crude oil prices from the lows experienced during the first quarter of 2009 continue to provide considerable support to industry activity levels and financial profiles. Credit profiles across the oil & gas sector are expected to be largely in-line with 2009 levels, with exceptions for the refining and drilling and service sectors, Fitch said.
The key risk for upstream companies and integrateds relates to the potential for weaker oil prices during the year.
Fitch sees reasons to believe the current run in crude prices may not be fully based on fundamental factors, exposing the sector to changes in monetary and fiscal policy and modified inflation expectations in 2010. As a result, should global economies and/or the appetite for oil as an inflation hedge weaken in 2010, oil prices could fall dramatically leading to further downside potential for the sector.
… inflationary expectations, combined with the significant amounts of liquidity being injected to global financial markets, are expected to keep crude prices above the price levels justified by the underlying supply/demand fundamentals.
Fitch’s stable outlook is not uniform across all sectors and credits within the oil & gas industry. In general, upstream, oil focused companies should see improved cash flows and credit metrics during the year stemming from higher oil prices. Natural gas prices are expected to remain weak which could result in weaker credit profiles for companies focused on natural gas related drilling. However, the refining sector remains under the most pressure as a result of continued low utilization rates, weak margins and continued falling end-user demand.
While the drilling and services sector is expected to weaken modestly, contract backlogs and the run in oil prices are expected to continue supporting activity levels and credit profiles of these firms. Merger & acquisition (M&A) event risk continues to be a concern, although high oil prices and strong 2010-2011 futures prices for natural gas have mitigated activity to-date. Offshore drilling companies continue to look to the current downturn as an opportunity to expand fleets. Weak refining conditions have resulted in significantly reduced prices for refining assets leading to potential risks for bondholders across the sector. Fitch notes that event risk remains issuer-specific.
For details, see Oil & Gas 2010 Outlook: Exposure to Deflation Remains High (Premium)
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