THE continued plunge in crude oil prices is expected to put heavy pressure on the profitability of exploration and production (E&P) companies in South and Southeast Asia, primarily those that produce a high proportion of liquids or export crude price-linked liquefied natural gas (LNG), Moody’s Investors Service said.
In its just-released Asia Oil & Gas Quarterly, Moody’s forecast crude oil prices will remain weak in 2015 and 2016 and said it is unlikely that producers will have an effective supply response until at least 2016.
According to Vikas Halan, Moody’s vice president and senior credit officer, in the agency’s rated universe of South and Southeast Asian producers, those with a larger proportion of liquids to natural gas production in fiscal year 2013 are now most vulnerable to the crude price decline.
“Although Oil and Natural Gas Corporation Ltd. (ONGC, Baa2 stable) and Oil India Limited (OIL, Baa2 stable) have the highest proportion of liquids production among regional rated oil and gas companies, the negative impact of lower oil prices on their revenues and earnings will be cushioned by a corresponding decline in fuel subsidies,” Halan said.
Halan pointed out that if oil prices are sustained at $55/bbl for a year, it may be expected that the fuel subsidy burden on ONGC and OIL to fall to about $10 to $12 per barrel from $56 per barrel in fiscal year ended March 2014.
Such a decline in subsidy burden would mean that the net realization for these companies will still be about $40 to 45/bbl as compared to about $50/bbl achieved in that fiscal year.
The impact on ONGC and OIL, Halan added, will be further cushioned by the Indian government’s decision to raise the price of domestic natural gas as they will benefit from an increase in revenues.
“And although Petroliam Nasional Berhad’s (A1 stable) oil production remains under 50 percent, its profitability will be more affected than peers with a similar production profile because of its LNG sales that are linked to crude oil prices, albeit with a delay,” said Halan.
In 2013, LNG sales accounted for a further 39 percent of total sales volumes.
Despite its substantial exposure to lower oil prices and high dividend payouts to the government, PETRONAS’ ratings remain well positioned, given its strong liquidity and conservative financial policies, according to Halan.
Companies with a higher proportion of domestic gas sales will be less affected because such volumes are typically sold at fixed prices.
“In our rated portfolio, Pertamina (Persero) (P.T.) Baa3 stable), PTT Exploration & Production Public Co. Ltd. (PTTEP, Baa1 stable) and Energi Mega Persada Tbk. (P.T.) (EMP, B2 stable) produce more natural gas than crude and are also predominantly domestic focused,” Halan said.
However, he stressed that earnings for Pertamina are largely derived from the company’s upstream business. Thus, despite a lower proportion of liquids production, its earnings will be significantly impacted by the decline in crude oil prices.
Such a decline will put further pressure on Pertamina’s credit metrics, which have already been deteriorating over the last two years as the company has embarked on debt funded investments.
“This could, in turn, put pressure on Pertamina’s fundamental credit profile, although its final Baa3 rating should continue to remain supported by its close alignment with the Indonesian government,” Halan added.
Moody’s also noted that the recovery in margins for refiners in the region — as exemplified by the Singapore complex gross refining margin (GRM) — has largely been on the back of lower crude prices and strong seasonal demand across the barrel.
“We expect refiners will benefit from the stronger margins in Q4 but will, at the same time, record inventory losses, given the decline in oil prices during the quarter. We expect the regional GRM to remain weak in 2015, but largely flat against 2014 levels of around $6/bbl as capacity additions will continue to outpace demand growth,” Halan said.
RITCHIE A. HORARIO