Moody's: Stable ratings outlook for Asia Pacific oil and gas sector

By OGJ editors

HOUSTON, Aug. 17 -- The outlook for the Asia Pacific oil and gas sector is stable, based on strong international crude oil prices that are expected to rise well into 2005, Moody's Investors Service said in a recent study released by its Sydney office.

The study gave a stable rating to nine majors in the Asia Pacific region, citing strong crude oil prices, and sound production growth profiles in 1-2 years for most of those companies. The study excluded Japan.

"The E&P companies have used the current strength in oil prices to enhance their balance sheet structures through lowering financial leverage and creating solid levels of liquidity," Moody's Vice-Pres. and Senior Credit Officer Terry Fanous wrote.

A strong production rebound is expected due to the scheduled commissioning of major projects.

"Accordingly, positive rating trends could emerge over the medium term for some of the (exploration and production) companies, which post solid and sustainable growth in output, and hence strong cash flow coverage measures relative to their industry peers," Fanous said.

Moody's noted that four of the nine companies in its report were state owned, adding that state ownership of certain companies in the region is expected to remain a dominant feature of government policy.

In Malaysia, Thailand, and China, oil and gas companies are wholly or majority government-owned. Australia has a deregulated regime. South Korea maintains a deregulated oil sector, but its government continues to protect the industry, Fanous said.

Credit drivers
Above-average oil prices are expected to continue for 6-12 months, driven in part by strong demand from China and India in addition to improved Western demand.

"China's oil consumption grew 11.5% last year, the highest in the world. . . Other factors behind the strength in oil prices include security concerns in the Middle East and tightness in supplies for oil products," Fanous said.

Moody's believes, "the current cyclical upswing in Asia is likely to persist for some time," he said. "We do not expect government initiatives to curb growth in certain industries to materially affect domestic oil consumption. China's demand for fuel oil should remain strong, given its increasing role in supporting the power sector. Other fuels, such as gasoline, diesel, and jet fuel, should also be well supported."

The credit rating agency forecasts a base case average price of $28-30/bbl for US benchmark West Texas Intermediate for 2004 and $20-22/bbl after that.

Challenges
However, the study pointed out that the Asia Pacific region's oil and gas companies still face various challenges, including the need for high capital spending programs to develop reserves and boost production, strengthen gas networks, and upgrade refining facilities.

Furthermore, acquisitions and developments of reserves in politically less stable countries are raising operating challenges and event risk, Fanous said.

Almost all E&P companies in the Asia Pacific region are pursuing overseas investments as part of their growth strategies, a trend that has gained pace in 2-3 years because of the mature nature of Asia Pacific basins, he said.

Moody's expects that these companies will continue seeking overseas opportunities, especially onshore China, Malaysia, and Australia, where production output is undergoing a long-term natural decline.