By early 2021, the rating agency expects the global economy will recover and oil prices return to $50-$55 per barrel (bbl), recovering from current lows in the $40-$45/bbl price range. However, should this outlook on the resilience of the global economy prove too optimistic, oil and gas prices remain in the doldrums.
A supply correction would be urgently needed to lift energy prices, but OPEC plus Russia have so far not agreed to reduce production. “The sharp reduction in demand for oil products worldwide and the supply shock resulting from disagreement among oil-producing countries in the face of the coronavirus crisis has led to depressed and extremely volatile oil prices,” said Steven Wood, Managing Director of Moody’s Corporate Finance Group.
“We expect prices to remain low through 2020, before the market rebalances as supplies finally decline,” he said. However, Moody’s also considers downside scenarios, in which oil and gas prices remain weak into 2021 on the back of longer-than-anticipated economic weakness due to the global health crisis.
‘Negative’ outlook for oil & gas sector
As the pandemic progresses, Moody’s also changed the outlooks for the global integrated oil and gas sector and for the global E&P industry to negative from stable. The upstream industry’s EBITDA is expected to fall by more than 30% this year, no longer achieving a previously anticipated 5% growth. The fall is largely driven by lower earnings and cash flow from upstream operations amid substantially lower oil prices.
The outlook for the exploration and production (E&P) sector has also been lowered to negative, with EBITA seen fall by more than 20% this year amid plunging demand and low prices. After oil prices dropped more than 70% in Q1-2020, upstream companies slashed capital spending and dialed back production and growth estimates, with related run-on effects on midstream companies such as pipeline operators.
Strikingly, Moody’s changed its outlook for the global midstream energy sector to stable from positive. “Although attributes such as the regulated fee-based contracts associated with US interstate natural gas pipelines lend the sector stability, supply and demand shocks in the broader energy environment will see EBITDA grow only negligibly, if at all, this year,” analysts commented. The rating agency hence expects global midstream sector EBITDA to grow within the -5% to 5% range in 2020.