Weak prices 'may hurt ratings' of oil and gas firms

Despite the grim outlook, S&P expects oil prices to improve in the next two years, with Brent crude seen recovering to US$55 by next year.
Despite the grim outlook, S&P expects oil prices to improve in the next two years, with Brent crude seen recovering to US$55 by next year.PHOTO: BLOOMBERG

Asia-Pac companies may have to cut capital spending or dividend payouts, says S&P

If oil stays under US$50 a barrel for a prolonged period, Asia-Pacific oil and gas firms may have to scale back capital spending or dividend payouts to defend their credit ratings, Standard & Poor's said.

Negative cash flow, the result of these firms expanding production through capital expenditure or acquisitions, had not been a problem when the outlook for oil was favourable. But the situation has changed.

"The ratings on 40 per cent of the (16) oil and gas companies we rate in the Asia-Pacific and 60 per cent of the stand-alone credit profiles will face downward pressure if oil prices fall 10 per cent below US$50 per barrel without any signs of recovery," Standard & Poor's credit analyst Mehul Sukkawala warned.

Overall, the ratings of Chinese state-owned enterprises and Australian companies are the most vulnerable, while the stand-alone credit profiles of the government- owned firms in countries such as Indonesia and South Korea are at the greatest risk, he noted.

Meanwhile, low oil prices have also resulted in a dramatic slowdown in acquisitions.

TOUGH DECISIONS

If the oil price outlook worsens, Asia-Pacific oil and gas companies will need to reassess projects, weigh returns, prioritise investments and review shareholder distributions.

STANDARD & POOR'S CREDIT ANALYST MEHUL SUKKAWALA

After touching a high of US$45 billion in 2012, new acquisitions have shrunk to little more than US$1 billion (S$1.4 billion) in the first 10 months of this year. This is despite the region facing an oil and gas deficit, and state-owned companies in China and India having a mandate to improve national energy security.

"If the oil price outlook worsens, Asia-Pacific oil and gas companies will need to reassess projects, weigh returns, prioritise investments and review shareholder distributions," Mr Sukkawala added.

"Defending credit-worthiness in a tough environment will call for some difficult decision-making, particularly at the government-owned companies that dominate the sector."

That said, the rating agency sees oil prices improving in the next two years, with Brent crude seen recovering to US$55 by next year.

Oil and gas firms in the Asia-Pacific are still better off than those in other regions, where the energy sector has been a significant contributor to higher default rates.

This is mainly because the energy firms rated by S&P are generally large, have good financial positions despite low oil prices and benefit from close strategic relationships with their respective governments, S&P said.

The tumble in profitability due to falling oil prices has pushed up the leverage of these companies. Not helping too is the fact that companies, particularly those owned by the government, have been very slow to cut back on capital spending.

But the weakness in these companies' operating profit could have been much worse if not for mitigating factors, S&P said.

For instance, companies such as Malaysia's Petroliam Nasional, Indonesia's PT Pertamina and Thailand's PTT Exploration and Production have gained from long-term gas contracts, which are more stable than oil prices.

Companies such as China Petrochemical (Sinopec Group) benefited from better margins in the refining and petrochemical businesses, while others are reaping the rewards of lower operations costs and domestic currency weakness.

A version of this article appeared in the print edition of The Straits Times on October 29, 2015, with the headline 'Weak prices 'may hurt ratings' of oil and gas firms'. Print Edition | Subscribe