Standard & Poor's Ratings Services has revised its price assumptions for Brent and West Texas Intermediate (WTI) crude oil as well as for Henry Hub natural gas, according to a report published today on RatingsDirect.
The change in the oil price deck reflects a shift in the near-term futures pricing curve and Standard & Poor's projection that marginal production costs will be lower due to improved drilling efficiencies. The natural gas price revision reflects Standard & Poor's assessment of the ongoing shift of gas production to lower cost, highly productive formations such as the Marcellus and Utica shale plays, according to the report titled "Standard & Poor's Revises Its Crude Oil And Natural Gas Price Assumptions."
"As is our practice when our underlying assumptions change, we plan to review the rated exploration and production issuers under these new assumptions," said Standard & Poor's credit analyst Thomas Watters. "The review will also take into account company-specific factors, including our other rating assumptions and issuers' flexibility to adapt to lower prices, hedge positions, and liquidity."
The new prices assumptions are $50 per barrel (bbl) for Brent (down $5 from the previous price assumption) and $45/bbl for WTI (down $5), while Henry Hub will remain $2.75 per million Btu for the remainder of 2015. For 2016, price assumptions are $55/bbl for Brent, $50 for WTI, and $3 per million Btu for Henry Hub. For 2017, price assumptions are $65/bbl for Brent, $60/bbl for WTI, and $3.25 per million Btu for Henry Hub. For 2018 and beyond, the price assumptions are $70/bbl for Brent, $65/bbl for WTI, and $3.50 per million Btu.
Standard & Poor's indicates that its fundamental view of the industry over the next 12 to 24 months has not changed since its last update in March, but that the decline in its oil price assumptions represents the prospects of a more prolonged recovery. Despite 2015 capital spending cuts of 30% to 40% by many US E&P companies and prices that are lower than many producers' all-in drilling and production costs, there has not been a significant decline in oil production, says the report.
New wells drilled in the fourth quarter of 2014 continue to support production, and producers have shifted capital to their most productive and profitable wells. In addition, many lower-rated producers have above-market hedges in 2015, making it economically feasible for them to continue drilling. Also, most producers enjoyed abundant access to capital in the early part of the year, enabling them to continue to outspend cash flows.
The price assumptions described in the article are effective immediately.