The oil- and gas price malaise could last for another three years, putting more pressure on energy companies to slash development, production and overhead costs, Moody's Investors Service says.
Deeper cuts are on tap for the North American exploration and production sector following major cost reductions in the first half of this year to deal with squelched cash flows, the credit-rating agency said in a new report that studied 90 companies.
A miserly operating structure is crucial for reinvesting into new reserves to replace output while also servicing debt as prices languish. Costs vary widely among companies and regions, and producers with high costs and debt levels face the biggest risks, said Moody's vice-president and senior credit officer Gretchen French.
"It puts into question the sustainability of their asset base through a period of prolonged weak commodity prices," Ms. French said.
Moody's published the study as Canadian heavy oil prices slumped to levels not seen since the financial crisis of 2008 and 2009, and benchmark North American oil prices have fallen back to the low $40s (U.S.) per barrel. To cope, producers have cut both head office and field staff, as well as budgets and dividends.
Moody's said the commodities could remain weak through 2018, averaging $50 a barrel this year and not rebounding to $60 until 2017.
The agency concentrated on "leveraged full-cycle costs" – the amount needed to produce a barrel, replace it with new reserves and service debt. The median for the group is $42 per barrel of oil equivalent, which Moody's sees as low enough to withstand expected weak pricing. The median is higher for oil and gas liquids producers than it is for companies with more natural gas production.
Among liquids producers, Calgary-based Seven Generations Energy Ltd., which operates in Alberta's Montney region, has the lowest full-cycle costs at $20 per barrel, the agency said.
Lightstream Resources Ltd. and Northern Blizzard Resources Inc. have among the highest costs at $102.52 and 130.88 a barrel, respectively.
For gas-weighted producers, Canbriam Energy Inc. is the Canadian leader at $2.66 per thousand cubic feet, below the group's median of $3.98.
The downturn has forced several companies to seek concessions from lenders, as well as to bolster their balance sheets through equity issues and asset sales. The price collapse has weighed heavily on credit ratings, Ms. French said.
"We've had a number of challenged credits in the space and we've had a number of downgrades, particularly if you're looking at B-rated and below, where liquidity concerns have been most paramount," she said.
"You have seen pressure on ratings because of inability to meet covenants, limited availability on revolving credit facilities and unsustainable capital structures."