TEXT-Moody's says independent exploration and prod outlook neg

(The following statement was released by the rating agency)

Jan 5 - The Independent Exploration and Production industry's outlook was changed to negative because of the precipitous decline in oil and natural gas prices to levels that are likely to result in abnormally low cash margins and fundamental credit deterioration, says Moody's Investors Service.

"This increased likelihood of fundamental credit deterioration beyond our normal cyclical expectations is a key driver for our negative outlook," says Moody's VP- Senior Analyst Peter Speer.

"In addition, the potential reduction in credit availability to the speculative grade companies also weighed heavily in our forward view." According to Moody's, there is significant risk that E&Ps have entered a prolonged period of abnormally low cash margins and returns due to persistent demand-driven price declines outpacing cost reductions and supply response.

"Many E&P's had fully ramped up capital spending and were increasing leverage just as the market turned," says Speer, "as a result, some companies are ill-prepared for a downturn."

Crude oil and natural gas prices were on a roller coaster ride in 2008, says Moody's. "Our long-term fundamental ratings for these E&P companies are driven by their scale, cost competitiveness, capital productivity and leverage profiles -- not by commodity prices," says Speer.

However, the extreme reversal in prices over the past six months followed an enormous ramp up in E&P capital spending that could not be throttled back as fast as prices have declined.

Overall, most investment grade E&Ps have sufficient cash resources, committed credit availability and flexibility in their capital expenditures to manage through current low commodity prices, notes Speer. On the other hand, speculative grade E&Ps are at significant risk of bank borrowing base reductions.

Key issues in the coming year include the impact that global macroeconomic fundamentals have on oil demand and prices, as well as oilfield services costs and the expected adjustment in response to lower E&P activity, says Moody's. The full report, titled, "Independent Exploration and Production (E&P)," is available at www.moodys.com.