Prospects for a recovery in the energy sector have been getting dimmer in the past several weeks, and Tuesday’s announcement from Moody’s Investor Services darkens an already bleak picture. The ratings agency lowered its price assumption for Brent crude from $53 a barrel to $43 a barrel and its assumption for West Texas Intermediate (WTI) crude from $48 to $40. Moody’s expects the price of both benchmark crudes to rise by a paltry $5 a barrel in 2017.

As we have already noted, both Brent and WTI are already selling below Moody’s forecast averages for next year. The outlook does not improve much as the years pass either, according to the ratings agency:

Moody’s has also significantly reduced its medium-term price assumptions for Brent and WTI, to $63 per barrel and $60 per barrel, respectively. These reductions reflect the rating agency’s view that the supply-demand equilibrium will eventually be reached at around $63 per barrel for Brent, but only at the end of the decade.

That medium-term outlook is based on a “lower-for-much-longer” scenario and will be particularly harsh on oil and gas exploration and production (E&P) companies and oilfield services firms. Moody’s reaffirmed its negative outlook on integrated oil and gas companies, E&P firms and oilfield services providers.

The negative outlook for these sectors is based on an expectation that Iranian production will rise significantly in 2016 and that demand from China may slow as that country’s economy cools off.

The integrated oil and gas sector, including such giants as Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX), will be driven to cut capital spending (capex) even more in 2016, despite a 20% reduction in 2015, and Moody’s anticipates negative free cash flow through the end of next year.

Chevron already has released an estimated capex budget of $26.6 billion for 2016 that is 24% below its estimated 2015 budget of around $35 billion. In 2014, Chevron capital spending totaled $40 billion. That’s a drop of one-third in just two years.

Exxon has not yet announced its 2016 capex budget, but the company spent $42.5 billion in 2014, and 2015 spending has been estimated at about $34 billion. If Exxon chops the Moody’s average 20% from its 2016 budget, capex in 2016 will total around $27.2 billion.

Both Exxon and Chevron have an advantage over the smaller E&P companies that borrowed large amounts of cash to finance new drilling before the bottom fell out of the market in the last part of 2014. Those that have survived 2015 did so on the strength of asset sales and sharp cuts to capital spending. But it’s not clear how many of these firms planned for the “low-for-much-longer” scenario. Making enough EBITDA to pay interest charges could be challenging for a firm like Apache Corp. (NYSE: APA), with a long-term debt-to-equity ratio at the end of the third quarter of around 73%.

Another E&P firm, Hess Corp. (NYSE: HES), with a long-term debt-to-equity ratio of just over 29%, could fare better. And either Apache or Hess, or any of a number of other smaller E&P companies, could be in the sights of one of the large integrated firms.

The ratings agency has maintained a stable outlook on the refining and midstream sectors, noting that growth will flatten out in the refining sector and slow down among midstream companies, but positive growth will continue.

Moody’s also lowered its price assumptions for North American natural gas prices at Henry Hub to $2.25 per million BTUs in 2016, $2.50 in 2017 and $2.75 in 2018, a reduction of $0.50 to the firm’s previous estimates for all three years.

The rating agency also cut its forecasts for natural gas liquids prices to $12 per barrel of oil equivalent in 2016, $13.50 in 2017 and $15 in 2018, with a medium-term price of $18 per barrel, down from $25 previously.

One final note: Dividends are likely to be the last thing to go. The recent example of what happened to Kinder Morgan stock as investors bid the shares down, anticipating the eventual dividend cut, is fresh in executives’ minds.

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