Asia-Pacific oil companies face downgrades if oil prices stay low: S&P

 

The report, titled "More Downgrades Are Possible For Asia-Pacific Oil Companies If Oil Prices Don't Recover," said companies with a higher proportion of production from oil than gas are particularly vulnerable, and the financial headroom of many players has already greatly reduced. 

"We expect a rebound in oil prices from 2016 onward, which would contain the risks to ratings," said Standard & Poor's credit analyst Lawrence Lu. "But if the rebound doesn't happen and companies fail to promptly react to the changing environment, the pressure on ratings and stand-alone credit profiles will increase."

For now, gas exposure and state ownership cushion most Asia-Pacific oil and gas companies from low oil prices. More than half of the oil and gas companies in the region rated by the agency are national players. 

The ratings on many of these companies remain stable despite the sharp fall in prices because of the support from their respective governments and focus on natural gas. Gas prices do not move in tandem with crude prices and they are regulated in some markets. In addition, we believe many oil companies still have the latitude to repair their credit metrics, such as through cutting back on their capital spending and operating costs, S&P noted.

"Three companies in the region have already felt the pain of the plummeting prices," Lu said.

A small Chinese oil producer, MIE Holdings Corp, was recently downgraded to 'B' from 'B+' on January. 19, 2015, on the belief that the company's cash flow leverage could deteriorate and its overall production may drop more than the previous forecast.

S&P also lowered the ratings on Australia-based Santos Ltd by one notch to 'BBB/A-2' on December 8, 2014, due to the strain of the falling prices on the company's earnings and cash flows, and its sizable committed capital expenditure programme. The outlook remains negative. 

It also placed the 'BB' rating on Vedanta Resources Plc on CreditWatch with negative implications on January 6, 2015. Vedanta is a diversified metals and mining company with significant exposure to crude oil production. In our view, the weaker performance of Vedanta's oil business is likely to offset the benefits from an improvement in its aluminum business, higher zinc volumes and prices, and better conversion margins in its copper business.