Profitability and cash flow generation across the global integrated oil and gas industry appear to have bottomed out, helped by the recent recovery in oil prices and easing in industry costs, Moody's Investors Service said in a new industry outlook entitled “Integrated Oil Bottoms Out as Demand Growth Resumes.” The improving global demand conditions supported by a gradual economic upturn are expected to underpin the recent recovery in oil prices and upstream results going into 2010. Therefore, Moody's has revised its outlook for the sector to stable from negative. The report expresses Moody's expectations for the fundamental credit conditions in the industry over the next 12-18 months. “Moody's believes that the resumption of growth in global oil consumption, fuelled by buoyant demand in developing economies and modestly improving conditions in OECD countries, should help support oil prices over the next 12 months, close to their recent trading level of $75 per barrel,” said Francois Lauras, vice president-senior credit officer in Moody's Corporate Finance Group. “The more favorable pricing environment should support the recovery in the companies' upstream profitability from their lows of mid-2009, despite continuing pressure on natural gas market prices, and help mitigate the likely continuing negative impact of depressed refining margins on their downstream results.” Moody's noted that a renewed focus on operating and capital cost efficiency against a backdrop of cost deflation will also help most incumbents return to neutral free cash flow generation. “These efforts, in turn, should help stem the recent increase in debt and start reversing the deterioration in financial metrics witnessed during the past 12 months,” said Lauras. In the longer term, Moody's believes that access to new resources will remain a key challenge for the integrated majors, despite recent significant oil discoveries around the world. The companies also face increasing competition from national oil companies such as China's state-owned energy groups, which are keen to ensure the energy security of their resource-hungry economies while satisfying their own growth aspirations. Furthermore, despite the change in market environment of the past year, the integrated majors continue to face pressures arising from resource nationalism, as oil-rich host countries like Brazil, Nigeria and Libya consider unfavorable changes in fiscal and regulatory regimes. __
