The global oil industry appears poised for stronger performance in 2018, having benefited from the financial discipline and cost-cutting innovation driven by several years of low oil prices and looking ahead to somewhat more stable market conditions.
While oil prices have recently risen above $60/bbl, likely reflecting a number of short-term supply disruptions and concerns over Middle East tensions, forecasts generally call for prices to fluctuate sustainably between $40/bbl and $60/bbl and end the year in the higher part of that range.
“Higher prices in or above that range will increase supply as countries lessen compliance with production quotas and United States shale production keeps increasing,” said Moody’s Investors Services in its 2018 industry outlook.
Boosting Capital Returns
In North America, Moody’s expects exploration and production (E&P) companies to concentrate on boosting capital returns with the goal of achieving profitable growth within existing acreage and cash flows. The strong capital investment level of 2017 should lead to a surge in production, but greater capital discipline will rein in that growth after 2018, the firm said. Companies with the most exposure to quality oil acreage will achieve the best returns.
Although the global oilfield services (OFS) industry will continue its recovery into 2018, the health of the sector will remain frail, as the impact of oversupplied markets will offset higher equipment utilization in the early part of the year, Moody’s said. Ongoing pressure from customers will continue to be a factor, and OFS companies will also face expenses for reactivation and upgrades of service packages and higher labor costs.
Another significant market prospect is an expected uptick in mergers and acquisitions (M&A) in the operator sector, although M&A activity will probably lag within midstream businesses and the stressed OFS segment, Moody’s said. Independent E&P companies are likely to be attractive acquisition targets for larger independents and integrated oil companies.
Confidence Hike Backs M&A Growth
In its most recent Capital Confidence Barometer survey report, multinational professional services firm EY said that 69% of oil and gas executives surveyed indicated that their companies intended to pursue acquisitions, an all-time high for the annual survey.
Optimism about corporate earnings, credit availability, and equity valuations, supported by improved balance sheets, narrower bid-ask spreads, the consensus on oil prices, and the interest shown by private equity firms, are likely to propel M&A activity, EY said.
In the 2018 oil and gas outlook published by global professional services firm Deloitte, John England, vice chairman, US energy and resources leader, and Americas oil and gas leader, said that demand has increased “enough to give us hope but not yet enough to really move the needle.”
US Becomes Energy Exporter
Among the most important developments have been that the US in 2017 “came into its own as an energy exporter” and that US shale cost reductions are largely proving sustainable, England said.
“At some point, the market still needs a real demand boost to get prices moving upward in a meaningful way,” he said. “Unfortunately, right now it’s not clear if that card is still in the deck. Barring that, only a supply shock is likely to move the market significantly, and that’s not really how we want to re-balance the market.”