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Strategies & Market Trends : The Thread Formerly Known as No Rest For The Wicked -- Ignore unavailable to you. Want to Upgrade?

To: Lane Hall-Witt who wrote (2665)	12/7/1998 11:47:00 AM
From: backman	Respond to of 90042

Monday December 7, 11:24 am Eastern Time S&P takes various actions on oil companies (Press release provided by Standard & Poor's) NEW YORK, Dec 7 - Standard & Poor's today announced its rating actions on companies in the oil and natural gas industry as listed below. These actions have been prompted by recent deterioration in industry fundamentals that could cause very low and volatile oil prices to persist through 1999. As a result, Standard & Poor's is revising its 1999 oil forecast to $11-$13 per barrel for the West Texas Intermediate benchmark, while maintaining its intermediate-term forecast of $13-$15 per barrel. However, Standard & Poor's believes that oil markets will demonstrate significantly increased volatility in the near term, with prices having the potential to extend outside of forecast ranges for short periods because of weather changes and political events. Many of the causes of lower and more volatile pricing are cyclical and likely transitory, such as mild temperatures early in the heating season, bloated refined product inventories, and reduced demand caused by macroeconomic crises in emerging markets. However, several factors, such as the reluctance of major producers to restrain production to support pricing, are structural. If major exporters such as Saudi Arabia pursue strategies to increase market share, such a change could have serious, lasting, negative implications for high-cost oil-producing companies. In addition, Standard & Poor's expects the pace of industry consolidation to increase, as many companies have either exhausted internal cost-reduction efforts or experienced diminished access to capital. The impact of such business combinations (e.g., Exxon/Mobil and BP/Amoco) may be to lower break-even pricing, thus further pressuring competitors with weaker cost structures. Until recently, the U.S. oil and gas industry has been aided by relatively strong U.S. natural gas prices. However, the U.S. natural gas market has become very dependent on weather-related demand growth because of ample natural gas inventories, steady natural gas production capacity, and the renewed competitiveness of fuel oil. Mild weather early in the heating season has increased the velocity of inventory building and has caused cash prices to fall to less than $1.00 at the Henry Hub. Standard & Poor's expects average 1999 U.S. natural gas prices to test the lower band of its forecast range of $1.80-$2.20 (Henry Hub), and may revise its forecast downward should abnormal weather patterns continue. Standard & Poor's believes that the companies most at risk for near-term deterioration in credit quality are independent exploration and production companies with weak competitive positions and/or high financial leverage. If hydrocarbon prices remain depressed, these companies may continue to experience diminished financial flexibility because of lower cash from operations, difficulties selling assets at anticipated price realizations, adverse redeterminations of the carrying value of oil and gas properties, inhibited access to capital markets to refinance maturing debt, possible covenant violations, and reduced availability under bank credit facilities. Even those few companies mitigating short-term price volatility through their hedging programs will encounter increased difficulties meeting their financial commitments and investing sufficiently to maintain their production capacity should prices remain at weak levels. During the last two months alone, two rated independent exploration and production companies (National Energy Group and Forman Petroleum) have defaulted on their public debt, whereas there had been no defaults on rated public oil and gas debt during the prior three years. Major integrated companies are expected to fare better than the independents because of their downstream diversification and generally lower cost structures and financial flexibility. Expectations for lower oil and gas prices have prompted most major integrated oil companies and independent exploration and production companies to re-evaluate their capital spending programs. Lower industry capital spending will cause a direct contraction of the cash flow of many service companies, although their financial flexibility is buttressed by relatively low reinvestment requirements. Contract drilling companies with spot market contracts, especially those in the commodity land rig and shallow-water Gulf of Mexico drilling rig markets, have seen weakening utilization and day rates. This decline in rig activity in the Gulf also has caused falling day and utilization rates in the shallow-water offshore support vessel industry. However, service companies with high levels of committed contract backlogs, such as those participating in deep-water and international drilling markets, should perform better in the near term than companies dependent on spot business. Many of the companies identified today by Standard & Poor's already have been the subject of negative rating actions or outlook changes in 1997 and 1998, and could be subject to further changes. Should industry fundamentals continue to erode, those companies with negative outlooks, especially those carrying speculative-grade ratings, are susceptible to ratings downgrades. RATINGS LOWERED FWIW...to me, it looks like one could spend a lot of time "trolling the bottom" if this is a buy and hold, "it can't get any worse" play david s