PTTEP has room to up investment: Moody's

PTTEP, China National Offshore Oil Corp (CNOOC), Korea National Oil (KNOC) and China Petroleum and Chemical (Sinopec) can spend US$2 billion to $10 billion (Bt62 billion to Bt310 billion) in addition to their announced capital spending plans “without hurting their underlying credit quality”.
Three companies – China National Petroleum Corp (CNPC), Malaysia’s Petroliam Nasional (Petronas) and India’s Oil and Natural Gas Corp (ONGC) – have very high or high capacity to make acquisitions thanks to their substantial cash on hand and/or low debt levels. They can spend more than $10 billion on acquisitions in addition to their announced capital spending plans without hurting their underlying credit quality.
Two firms – Pertamina and Woodside Petroleum – have low to moderate flexibility to make small acquisitions of no more than $2 billion.
“Whether acquisitions would affect overall credit quality and ratings would also depend on further analysis of government support to the national oil companies and the transparency and track record of that support,” said Simon Wong, a Moody’s vice president and senior credit officer.
In a just-released report titled “Asia Pacific Oil and Gas Industry: Exploration and Production: Acquisitions, Investments Pressure Fundamentals of Some Asian Oil Companies”, Moody’s said large capital-spending programmes and acquisitions would remain key sources of pressure for the standalone credit quality of many investment-grade oil and gas companies in Asia.
“In particular, companies at the lower end of the investment-grade rating scale will continue to face greater pressure from large debt-funded acquisitions and capital spending,” Wong said.
“Moreover, acquisitions of oil and gas assets with long development lead time are subject to greater execution delays or cost overruns, a credit negative. If acquisitions accelerate production output and diversify oil and gas reserves, then the pressure from large debt-funded acquisitions will reduce.”
According to the report, because most Asian oil companies are national firms – in which governments own large stakes and which often own or manage their strategic resources of their countries – their ratings incorporate a high to very high degree of explicit or implied government support. Moody’s believes that the need for acquisitions and large capital expenditure reflects the fact that Asian national oil companies are under pressure to invest in order to diversify their reserves geographically.
In addition, given the push by Asian governments to secure long-term energy supplies – including clean energy – amid rising domestic demand, these companies are seeking to expand their production sources.
The ability of companies to complete deals beyond those already announced will likely be complicated by the increasingly stringent regulations and controls that developed countries are implementing to limit foreign investment by Asian national oil companies in their hydrocarbon resources.
In another development, Standard & Poor’s Ratings Services said in a report titled “Government Links to Oil and Gas Companies Provide Support, but with Some Drawbacks” that government relationships mostly supported the credit profiles of oil and gas companies but these linkages could also be a negative influence.
“The extent of the influence of government relationships depends on the strength and durability of both the companies’ role and the sovereign link to the entity,” said S&P credit analyst Andrew Wong.
Ongoing government interactions and support also influence the standalone credit profile of government-related companies by typically enhancing the competitive position of the companies by boosting their market positions and helping them enhance their scale in domestic economies. Ongoing support also improves leverage and liquidity if the company benefits from routine capital injections. Moreover, it provides solid financial flexibility to the companies by enhancing their access to external financing.
However, government relationships also create the potential for negative government intervention, the report noted. The companies are generally highly sensitive to sovereign influence and actions, which can weaken their profitability, leverage, and cash flows. For example, government control of domestic prices, which can sometimes be below the cost of production. Moreover, they may be required to invest in strategic but low-profit and non-core assets, or share profits with or support other companies.