North America O&G Outlook Generally Stable but Faces Risks

The North American energy industry faces a generally stable operating environment although ongoing sovereign and economic concerns are risks in 2012, according to Fitch Ratings' 2012 outlook reports for the energy sector.

Fitch's outlooks encompass the oil and gas exploration, oilfield services, and refining and drilling segments.

Over the short term, Fitch expects crude oil prices could remain well above its long-term base case price deck of $65/bbl partially due to extremely lose monetary policies by the U.S. Federal Reserve. Fitch notes, however, that the single biggest threat to the crude oil market remains a decrease in overall global demand, due to the risks of potential recession in the U.S. and/or Europe and a decline in China's economy.

In the natural gas space, Fitch believes North American prices will remain weak in 2012 and perhaps hit multi-year lows, as ongoing increases in supplies of lower cost shale-based natural gas continue to outpace the growth in domestic demand for that fuel.

Balanced capital structures combined with strong underlying assets and robust liquidity support Fitch's stable outlook for the North American oil and gas industry. Most issuers have achieved their desired capital structures and Fitch anticipates that capex budgets will generally be matched with expected cash flows generated from operations.

Despite high oil prices and strong backlog protection, Fitch's outlook for the North American driller and oilfield services industry is negative for 2012, driven by an expectation of continued high capital spending that will limit near-term free cash flow generation.

Overall market conditions for the U.S. refining industry are stable but remain vulnerable to further global economic weakness. Operating cash flows and credit protections returned to the lower range of normalized levels across the sector in 2011, despite weakness in the macro economy.

Fitch anticipates that the dislocations in Brent-WTI spread, which dominated 2011 refiner results, will continue to be important but should decline in size as the resolution of capacity takeaway issues out of the mid-continent eases the bottleneck at Cushing, OK. As a result traditional drivers of refining profitability should gain in importance--including wider light-heavy spreads, higher clean product yields (especially distillates), and cheap natural gas. The refining industry's outlook for FCF is good in 2012, driven by reasonable cash flow and generally low mandatory capital spending requirements.