Moody's: North American Exploration and Production Companies Cut Capital Spending to Preserve Liquidity

North American oil exploration and production (E&P) companies are cutting capital spending dramatically in 2015, Moody's Investors Service says in a new report. By restricting capital spending to their highest-return assets and reducing development activity, the companies are seeking to preserve liquidity during the current low commodity price environment.

"We expect Moody's-rated E&P companies to reduce capital spending by 41% in aggregate this year, with investment-grade issuers cutting spending by 36% and speculative-grade firms by 47%," says Associate Analyst, Prateek Reddy. "Investment-grade companies are generally able to access the capital markets, even when commodity prices are weak, but speculative-grade firms today have more limited financial flexibility."

While 21% of Moody's-rated E&P companies will reduce their capital budgets by more than 60% in 2015, more than half will reduce spending by at least 40%, and 77% by at least 20%, Reddy says in "E&P Capital Budgets Cut in 2015 to Preserve Liquidity." Among investment-grade issuers, on one end of the spectrum Apache (A3 negative) is planning to cut capital spending by more than 60% this year in order to keep spending within operating cash flow.

Only about 6% of rated E&P companies plan to increase capital spending this year, with no investment-grade firms among them. Some of this group will spend more to hold leased acreage or invest in recent acquisitions, and some produce mainly natural gas, for which prices have not dropped as much as they have for oil.

"Unless they have hedging programs, E&P companies that concentrate more on producing oil and natural gas liquids will see more dramatic declines in earnings, unleveraged cash margins and cash-flow generation in 2015 than those that produce higher proportions of natural gas," says Reddy. "As a result, liquids-focused E&P companies are reducing capital spending more than their gas-focused peers."