Fitch: CAPEX cuts are both risk and reality for US E&P companies

The 2016 sector outlooks for the US oil & gas and oilfield services sectors are negative, according to Fitch Ratings, pressured by global supply/demand challenges, the threat of persistently low oil prices, and sharp CAPEX cuts.

"Capital markets access has been fickle for high-yield names, with many issuers resorting to self-help measures as a lifeline for survival," said Mark Sadeghian, senior director.

A second year of deep CAPEX cuts is likely for US exploration and production (E&P) companies, which will pressure oilfield service provider metrics in 2016. Fitch believes that the next wave of E&P cuts will more clearly focus on full-cycle resources and better balance of tradeoffs between development, cash conversion, and operational momentum.

Many of these cutbacks will fall on marginal producers in US shale, offshore, and Canadian oil sands. Fitch expects greater rationalization in the offshore market in 2016, with demand reaching an inflection point in late 2017 or early 2018.

As E&P companies prepare for lower well costs, increased productivity, and optimized returns, servicers may find that partnership opportunities provide a competitive advantage, including increased collaboration, incentives, and selective investments through the cycle.

A prolonged low-price environment and the resulting supply and demand dynamics remain key issues to watch. Oil-patch mergers and acquisitions (M&As) may also become more prevalent as a source of liquidity if prices remain low and capital markets remain closed to high-yield names.

Fitch expects that ratings of US oil & gas and oilfield services ratings will be mostly stable, with many of the most challenged names already facing downgrades in 2015.



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