Integrated oil and gas companies will see their earnings stabilize within the next 18 months, as higher crude prices and lower operating costs will raise profit margins in the upstream business, Moody's Investors Service said in a new report on Monday.
"Over the last year, integrated oil and gas companies have accelerated reductions in their operating costs to adjust to earlier oil price declines. As a result, most companies' upstream operations returned to positive net income generation in the second quarter of 2016, while also benefiting from an uptick in the price of crude," Elena Nadtotchi, a Moody's Vice President -- Senior Credit Officer and author of the report, says.
Moody's - which has held 'stable' outlook on the oil and gas sector since August 2016 - may raise its outlook to 'positive' should the companies' earnings before interest, tax, depreciation and amortization (EBITDA) increase by over 5 percent annually within the next 18 months. Conversely, if the core earnings of the integrated oil and gas companies drop by 5 percent or more, Moody's would downgrade its outlook to 'negative', according to the report.
Low crude prices have plunged the sector's EBITDA to the lowest levels in 10 years.
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The core earnings recovery, however, will be slowed down by this year's depressed downstream business earnings, which reflect the oversupply of refined petroleum products in Europe and North America, Moody's says.
The agency sees the sector generating around US$65 billion in negative free cash flow this year and next. Moody's also reckons the companies will keep on financing deficits with selling assets, issuing new debt, and cash balances in the near term.
Earlier this year, Moody's slammed the current model used by oil companies to remunerate executives as too dependent on growth and as such, outdated and not in line with the current prices. According to the rating agency, the focus should be moved from growth to value preservation, as is more appropriate for the current and mid-term future situation in the industry.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More