High crude oil prices, with reducing production costs, efficiency gains and improved discipline, have provided vitality for exploration & production (E&P) in the oil industry, Fitch Ratings said on Friday.
'The recent oil price recovery, combined with the cost-cutting measures undertaken during 2016-2017, has given fresh vitality to high-yield (E&P),' the global rating agency said in its latest report.
'Even highly leveraged companies with relatively high production costs are now healthier and should be able to reduce leverage over the next two years thanks to positive free cash flow,' according to the report named 'EMEA High-Yield Exploration and Production Peer Study - 2018.'
The agency said most companies in the oil sector managed to significantly reduce their production costs in 2017 compared to 2014, by improving their spending discipline and efficiency gains.
'However, the operating break-even oil prices vary significantly across the sector,' it said.
Fitch stressed that the main lesson learned from the last downturn in oil prices, during the 2014-2016 period, is that a lack of liquidity buffers can be fatal.
It said a decline in oil prices and operational issues are difficult to predict for the companies in the industry.
If crude prices would retreat in the long term, 'healthy liquidity, low costs, moderate leverage, and hedging discipline' will become significant differentiating credit factors in the sector, Fitch noted.
Due to low global demand and glut of supply in the market, crude oil prices slumped from $115 per barrel in mid-2014 to below $30 a barrel in January 2016, which saw billions of dollars evaporate, thousands of jobs lost, and hundreds of companies going bankrupt.
By Ovunc Kutlu in New York
Anadolu Agency
ovunc.kutlu@aa.com.tr