Moody's sees brighter Canada energy sector outlook
(The following statement was released by the rating agency)
LONDON, Jan 5 - The near-term credit outlook for Canada's oil and gas producers is brightening as oil prices have strongly rebounded from depressed levels and natural gas prices are supported by pipeline expansions connecting these suppliers to markets with growing demand, Moody's Investors Service reports.
``Cash flows are now rising sharply due to the recovery of oil prices, which have more than doubled from a year ago,' says Moody's Vice President/ Senior Credit Officer Dan Gates. Furthermore, low oil prices spurred an industry-wide effort to reduce costs, which has positioned well managed companies for stronger performance over the full range of the commodity price cycle.
Canadian natural gas prices are now at historically high levels, but may be sustainable over the medium term, given strong prospects for North American demand. The rating agency says that these positive changes will most likely be manifested in improvements in rating outlooks, rather than rating upgrades, due to Moody's approach of looking through the price cycle in the exploration and production sector.
Moody's did not downgrade any oil and gas producers based solely on weak oil and gas prices during the last market downturn, and likewise is not likely to upgrade any ratings based solely on stronger prices. However, the rating outlooks for several companies were changed to negative, to reflect their vulnerability if adverse market conditions were prolonged. Moody's currently rates 12 Canadian-based oil and gas producers, with ratings from Ba1 to Aa2, with a weighted average of Baa1 and outstanding debt of about $10 billion.
The rating agency also says that it expects industry consolidation to continue, albeit at a slower pace. ``The sector has consolidated at a record rate, reflecting opportunities to combine operations to reduce costs, the recognition of the benefits of larger size and greater asset diversity, increasing specialisation, asset rationalisation, and the weakened position of some companies,' Moody's Gates says.
The analyst says that such consolidation can be positive or negative for credit quality, depending on the particulars of the transaction. Recent acquisitions by large independents include Talisman's (Montreal:TLM.M - news) C$1.2 billion acquisition of Rigel Energy, and Canadian Natural Resources' (Toronto:CNQ.TO - news) acquisition of properties from BP Amoco and from Blue Range Resource Corp. (Toronto:BBRA.TO - news) The analyst also says that natural gas production is likely to resume its long-term trend of growth, although this growth is likely to fall short of the increase in pipeline take-away capacity over the next several years. With increasing production and less than 100% reserve replacement since the mid-1980's, the average reserve life for natural gas has fallen from over 30 years of production to about 10 years of production. ``The decline in reserve life is associated with faster monetization of reserves, which is a credit positive, but also may result in less flexibility to reduce spending during periods of low commodity prices, which is negative,' Moody's Gates says. Canadian companies are likely to focus on replenishing gas reserves domestically, while the larger producers will increasingly look abroad to less-explored, but politically riskier regions for growth in oil reserves.
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