BUSINESS

Credit rating agency DBRS expects the oil and gas sector to be stable in 2012

05/31/2012 11:29 EDT | Updated 07/31/2012 05:12 EDT
Credit ratings in the oil and gas sector will remain relatively stable in 2012, credit rating agency DBRS said in a report released Thursday even as oil traded at its lowest level of the year.

DBRS said that capital spending is "back on track" with the industry focusing on oil and natural gas liquids development.

"Capital expenditure grew significantly since a low point in 2009 when many companies scaled back spending to provide flexibility during the financial crisis," DBRS said in a report.

"In North America, the majority of capital spending is allocated for high-margin oil and liquids developments, shifting away from low-margin natural gas drilling."

Vivid memories of the 2008 financial crisis have prompted many companies to maintain conservative balance sheets, but operating cash flows for last year have surpassed the peaks of 2007 and 2008, the agency said.

A variety of factors including reports that the U.S. economy is growing slower than expected and China's manufacturing sector is slowing down have weighed on oil prices in recent weeks.

The continuing European financial crisis as well as an easing in tensions over Iran's nuclear program have helped cool prices.

The benchmark crude price, which has lost 17 per cent of its value in May alone, fell another $1.29 to close at US$86.53 in New York, while Brent crude lost $1.60 to $101.87 per barrel in London.

The price of natural gas was up less than a penny to $2.422 per 1,000 cubic feet on Thursday after dipping below $2 earlier this year.

Earl Sweet, senior economist at BMO Capital Markets, noted that investment intentions of oil and gas, as well as mining companies, earlier this year were very strong compared with other parts of the economy, but noted that has likely cooled.

"I'm sure some of those oil and gas and mining companies might be scaling back their investment plans a bit," Sweet said.

"But all those projects are long term in nature and the companies basically have in mind a long-term price, which is lower than the prices we saw a few months ago and maybe not all that different from what they are now."

Sweet added that a little bit of a slowdown wouldn't be all bad news as it would be the more marginal projects that would be affected and it would ease pressures on raw materials and labour.

DBRS said that assuming continued favourable prices for natural gas liquids, most of the companies should remain strong enough to support a high level of capital spending and growing dividends.

"Demand from Asia is the main driving force behind strong commodity prices and production growth," DBRS said.

"Over the past decade, oil consumption growth in Asia has significantly outpaced production growth in the region, creating a supply-demand imbalance and placing upward pressure on global prices."

The DBRS report noted many producers are helping fuel growth through collaborative investments and Canada has been an attractive place for foreign investment in the oil and gas industry in the form of acquisitions and joint ventures.

"As capex costs have increased, companies have found growth and increased flexibility in large spending projects through joint venture transactions and strategic alliances," the report said.

"Embracing sharing among partners of technology resources and technical expertise, along with information and best practices, has allowed projects too ambitious for a single company to be realized though collaboration."