Moody's Raises Natural Gas Price Assumptions While Lifting Oil Slightly

The changes reflect the rating agency's expectations that world crude prices will remain strong, while a constrained US market will result in a $15 per barrel (bbl) difference in 2013 between the two benchmark barrels of crude, European Brent and West Texas Intermediate (WTI). The revised price deck also assumes that North America's severe natural gas glut will ease a bit next year and onwards.

Moody's now assumes that European Brent crude will sell for an average $100/bbl in 2013, $95/bbl in 2014, and $90/bbl in the medium term, beyond 2014. This presents a higher price assumption for Brent than the previous recent assumption of $95/bbl in 2013 and $90/bbl in 2014. The assumption for Brent beyond 2014 is unchanged.

For WTI, the other main benchmark barrel, the ratings agency leaves its previous assumptions unchanged at $85/bbl in 2013, 2014 and thereafter.

Broad concerns about global economic growth and euro area sovereign debt will hold crude prices in 2013 and 2014 near their current levels, the ratings agency said. Greater efficiencies will also contribute to a reduction in exploration and production companies' capital spending budgets in 2013, Moody's said.

The firm noted, however, that today's historically strong oil prices still face a number of risks, including a China slowdown, worsening economic problems in Europe, and a return to US recession if negotiations fail to resolve the "fiscal cliff." In the meantime, heightening tensions and conflicts in the Middle East raise supply concerns, supporting oil prices.

Lower-than-expected natural gas inventories, meanwhile, led Moody's to lift its assumptions for the North American Henry Hub benchmark spot price by $0.50, to $3.50 per million BTU in 2013 and $4.00/mmBTU in 2014 and thereafter. North American natural gas prices had sagged in recent years as a shale and hydraulic fracturing boom and mild weather led to a significant oversupply, but prices have climbed in 2012 on coal-to-gas switching and hot weather, and as companies have scaled back their dry gas drilling activity.

Moody's assumptions for natural gas liquids (NGL) prices remain unchanged at $34/bbl in 2013, 2014 and thereafter, pegging NGL prices at 40% of WTI prices. NGL prices tend to shift in line with crude, not natural gas.

Moody's assumes stress-case prices of $60/bbl for both Brent and WTI, $2.00/mmBtu for Henry Hub natural gas, and $24.00/bbl for NGLs.

Price assumptions represent baseline approximations--not forecasts--that Moody's uses to evaluate risk when analyzing credit conditions within the oil and natural gas industry. Moody's periodically revises its oil and natural gas price assumptions to better calculate future financial metrics for companies in the oil and natural gas industry.

Steven Wood MD - Corporate Finance Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Terry Marshall Senior Vice President Corporate Finance Group(416) 214-1635 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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