LEADING global ratings group S&P says its outlook for the oil and gas sector is broadly stable with a somewhat negative slant for the oilfield services (OFS) and contract drilling segments.
The firm said its ratings outlook largely reflects its assessment of the sector’s improved balance sheets and cash flow metrics and a generally range-bound outlook for hydrocarbon prices
Key takeaways from its report “Industry Top Trends 2019” include:
- The 2019 outlook for many of the sector’s industries is one of general stability and largely reflects the range-bound price environment for hydrocarbon prices.
- There is a somewhat negative slant for the oilfield services and contract drilling segments.
- S&P’s forecasts show slightly improving credit metrics compared with last year, partly due to higher oil and gas production.
- Hydrocarbon price risk remains the number one risk in the sector. Slowing demand, regulatory issues delaying regional capacity pipeline construction, and regional price differentials remain the near-term threats.
- The sector has a significant amount of debt maturing over the next couple of years and any substantial drop in prices could lead to another round of defaults and bankruptcies (particularly due to many companies issuing or refinancing debt during the high oil prices of 2012-2014).
S&P’s 2019 hydrocarbon price assumptions are broadly flat, mirroring the futures curve trends.
The firm said it expects global capital expenditures (capex) to increase nominally, with the US demonstrating more substantial increases as steep decline curves warrant high investment.
However, it doesn’t expect North American OFS to improve much more due to regional takeout capacity restraints in the US, flattening rig counts, and product-line oversupply in some sectors of the OFS segment.
S&P also believes the offshore deepwater market has bottomed, however it doesn’t forecast it to experience a significant rebound anytime soon because the oil prices outlook doesn’t support many greenfield projects and there’s still too much rig supply in the market.
On the offshore contract drilling front, S&P said utilisation may have stabilised for floaters, and is increasing for jack-ups.
After reaching a peak of more than 80% in 2013, utilisation for floaters dropped to around 50% in 2017, and S&P expects levels to remain essentially flat until 2020. Although tenders and bidding activity for ultra-deepwater and deepwater floaters have recently picked up, we expect any new fixtures to essentially offset contracts that are rolling off over the next 12 months.
Meanwhile, utilisation for jack-ups has increased from around 50% in 2015 to nearly 65%, given the lower breakeven costs and shorter payment periods associated with shallow water wells.
Although S&P expects utilisation for floaters to improve in 2020, it doesn’t expect it to reach 85% until year-end, which is typically the level at which dayrates begin rising.
S&P says it assumes new contracts on ultra-deepwater rigs will be in the US$200,000 to US$225,000 per day range, on average, in 2019, increasing to about US$250,000 per day in 2020, with some variation depending on the rig quality and location.