Lower subsidy burden will help Indian companies cushion the impact
Moody's Investors Service says that lower crude oil prices will be prove negative for exploration and production (E&P) companies in South and Southeast Asia producing a high proportion of liquids or exporting crude price-linked liquefied natural gas (LNG). However, they will help support the margins of refiners.Moody's further considers that crude oil prices will remain weak in 2015 and 2016, and an effective supply response by producers is unlikely until at least 2016.
"In our rated universe of South and Southeast Asian producers, those with a larger proportion of liquids to natural gas production in FY2013 are most vulnerable to the crude price decline," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.
"Although Oil and Natural Gas Corporation (ONGC, Baa2 stable) and Oil India (OIL, Baa2 stable) have the highest proportion of liquids production amongst regional rated oil & gas companies, the negative impact of lower oil prices on their revenues and earnings will be cushioned by a corresponding decline in fuel subsidies," says Halan.
"If oil prices are sustained at $55/bbl for a year, we expect the fuel subsidy burden on ONGC and OIL to fall to about $10-12 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 $40-45/bbl as compared to about $50/bbl achieved in fiscal year ended March 2014.The impact on ONGC and OIL will be further cushioned by the Indian government's decision to increase the price of domestic natural gas as they will benefit from an increase in revenues," adds Halan.
"And although Petroliam Nasional Berhad's (A1 stable) oil production remains under 50%, 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. In FY2013, LNG sales accounted for another 39% of total sales volumes. Despite its substantial exposure to lower oil prices and high dividend payouts to the government, PETRONAS' ratings remains well positioned given its strong liquidity and conservative financial policies," says Halan.
Companies with a higher proportion of domestic gas sales will be less impacted because such volumes are typically sold at fixed prices.
"In our rated portfolio, Pertamina (Persero) (P.T.) (Baa3 stable), PTT Exploration & Production Public Co. (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," says Halan.
"Earnings for Pertamina, however, are largely derived from its upstream business. Therefore, 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 2 years as the company has embarked upon 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," adds Halan.
"We also note 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," says Halan.
"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," says Halan.
In the latest newsletter, Moody's also notes that it has lowered its price assumptions for Brent to $55/barrel (bbl) through 2015 and $65/bbl in 2016.
Moody's has also lowered its assumptions for West Texas Intermediate crude to $52/bbl in 2015 and to $62/bbl in 2016.
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