 "Oil price rout: Low cash costs, strong liquidity to help Asian oil companies")
Fitch expects companies to further reduce capex if oil prices remain at current levels for a longer period.
“The fall of oil prices below $50 per barrel is hurting cash generation and affecting investment decisions of companies in the sector. However, the impact on operating cash generation varies across Fitch-rated companies. Southeast Asian companies, such as PTT Public Company Limited and Petroliam Nasional Berhad that produce more gas (60 per cent or more of total production), will be less affected immediately compared with their north and south Asian counterparts that are more liquids-heavy,” Fitch said.
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Liquids at companies like Petrochina, CNOOC, Sinopec, Oil India Ltd and MIE Holdings Corporation account for over 70 per cent of total production in barrels of oil equivalent (boe) terms.
Low cash production costs and the largely conventional upstream projects of the rated Asian oil companies provide them with additional flexibility in today’s low oil price environment. While all-in costs (cash production costs plus depreciation, depletion and amortisation, or DD&A) are important in the long run, the relatively longer production lives of conventional oil and gas wells provide additional capex flexibility during periods of low hydrocarbon prices.
Lifting costs in US dollars per boe are typically in the teens for the rated companies in Asia. Lower production tax requirements stemming from low realised prices, especially in China, also reduce the net impact of the oil price rout on operating cash generation.
Companies are also looking to reduce opex, which can squeeze margins of oil field services companies, Fitch said.
Over the longer term though, with all-in costs exceeding $35 per barrel of oil equivalent for the rated Asian names, the economic viability of projects will be impaired if there is no meaningful increase in oil prices, the ratings agency said.
At current prices, Fitch expects certain high-cost projects to be delayed. These could include ventures in the Canadian oil sands and certain enhanced oil recovery projects on mature-depleting fields in Asia. Sponsor companies could also delay final investment decisions on some large projects with long lead times, such as some greenfield LNG projects, to preserve cash reserves.
In India, Fitch expects the government to reduce the substantial discounts ($56/barrel) the two state-controlled upstream companies, Oil India and ONGC, have to provide to refiners, improving their cash margins under low oil prices.
Malaysia's Petronas has a very strong balance sheet. However, the high dividends required by the Malaysian government remains a challenge, although the company is pushing to lower this burden.
Fitch also expects cash-rich companies to take advantage of attractive M&A opportunities, although their approach is likely to be measured to ensure their cash balances remain strong to deal with the uncertain oil price outlook. Asian companies are likely to focus on mid-sized assets that are producing or close to production that put less stress on their balance sheets.
Our approach with oil and gas companies is to rate through the cycle. While strong production, weak demand growth and high inventory levels put significant near-term pressure on oil prices, high global marginal production costs and capex cuts leading to reduced production should over time result in a more balanced market that supports higher prices for oil. While low oil prices and high capex requirements will dent the credit metrics of Asian oil producers, ratings of many of these companies, especially the state-owned companies whose ratings benefit from state linkages, remain resilient.