Scope Ratings has released its oil and gas outlook for the coming year, having analyzed performance of major international oil companies and some Europe-based entities.
Scope’s main forecasts for 2019 are: moderately lower oil price levels than in 2018 with Brent averaging between $60 and $70 per barrel; on average stable or slightly increasing refining margins (also driven by MARPOL 2020 low-sulphur emissions regulation towards the end of 2019) and petrochemical margins (mainly driven by strong demand growth); high volatility in prices and margins
The International Energy Agency estimates global oil demand growth at 1.4 mb/d in 2019. This is mainly driven by global economic growth, which is, however, subject to a number of risk factors such as trade tensions, tightening financial conditions, and the vulnerability of some emerging markets and developing economies. Global oil supplies are growing rapidly, as record output from the top three producers (Saudi Arabia, Russia and, in particular, the US) more than offsets declines from Iran and Venezuela. According to the forecast, there is projected supply overhang, assuming constant OPEC output throughout 2019. However, it is expected that Vienna Agreement countries (also known as OPEC+) will agree on production cuts to balance the market and support oil prices.
IOCs have returned to free cash flow generation and are now more resilient to price shocks than pre-downturn. Those companies with lower break-even levels in their upstream business and stronger exposure to downstream are expected to perform more robustly. Some of the excess cash to be distributed to shareholders via higher dividends or share buybacks (a key trend among Majors) or spent on growth projects (a key trend among Europe-based IOCs). There is also an increased but still limited focus on low-carbon businesses. Scope does not expect significant further debt reduction as target levels have been already achieved or are within reach. It expects more volatility in energy commodity prices.
In view of the rating agency, IOCs can sustain price levels in the lower $50 per barrel range for Brent crude oil without a material deterioration in their credit metrics, provided they adopt flexible shareholder remuneration and investment plans.