Moody’s: Proppant companies’ earnings will take hit as low O&G prices pressure drillers

Proppant companies will continue to see profit margins narrow as low oil and natural gas prices keep pressure on drilling firms, according to a new report from Moody’s Investors Service.

Moody’s said that the negative outlooks for the exploration and production (E&P) and oilfield services sectors will increasingly lead to weakness among proppant companies. Moody’s analysts expect to see EBITDA decline 10% to 20% for rated proppant companies based on their base-case oil, natural gas, and natural gas liquids (NGL) price assumptions and on expectations of continued volatility in the sector.

“As oil and natural gas prices remain low, drilling companies are cutting expenses to maintain profitability, and, in turn, more proppant companies are trying to reduce cost inefficiencies in their customers’ and their own supply chains,” said Karen Nickerson, vice president, Moody’s.

In the report, Moody’s analysts stated that proppant companies’ ability to quickly respond  to customers’ supply and cost efficiency needs will be vital in the coming year, noting US Silica (Ba3, stable), Fairmount Santrol (B1, stable), and Hi-Crush (B2, stable) as companies well-positioned to increase market share as the sector continues to go through a down cycle.

Still, Moody’s said that proppant companies face an uphill battle against macro-economic headwinds in the coming year. 

“Even with proppant companies driving down costs and increasing well usage, it won’t be enough to offset the dropping rig count and a buildup in uncompleted wells,” Nickerson said. “We expect to see proppant companies’ leverage increase throughout 2015 as their profit margins narrow.”

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