Fitch: APAC Oil & Gas Credit Quality To Remain Broadly Stable

Fitch Ratings has said today, in its "Asia-Pacific Oil & Gas: Credit Outlook 2010" report, that the overall credit outlook for the sector is broadly stable, although the outlook for some refiners remains negative.


"Most exploration & production (E&P) and integrated companies have significant headroom at their rating levels," says Steve Durose, head of Fitch's Asia-Pacific Energy & Utilities team. "Major investments to boost reserves and production, either organically or through acquisitions, are therefore not expected to exert any significant downward pressure on their ratings," adds Mr. Durose.

Whilst upstream oil businesses' cash flows can be unpredictable due to their dependence on volatile international oil prices, Fitch rates through the economic cycle and therefore does not upgrade during periods of high oil prices and downgrade when prices fall. Fitch expects that 2010's oil prices will benefit from inflationary expectations and the significant amount of liquidity being injected into the global financial markets. Therefore, the agency broadly expects operating cash flows to increase for upstream and integrated oil companies. However, Fitch does not expect balance sheets to strengthen significantly as any additional cash generated is likely to be spent on investment.

"On the other hand, downstream refiners will generally continue to face industry-wide capacity surplus, constraining utilisation and margins," adds Mr. Durose. Furthermore, the creditworthiness of some downstream Asia-Pacific oil and gas companies continues to be constrained by the obligation to supply refined products at prices which are subject to political influence rather than economically cost-reflective. If crude prices rise significantly above current levels for a sustained period, this risk will become more acute.

The ratings of many of the region's oil and gas companies are supported by their close legal, operational and strategic ties with respective government owners. Fitch does not expect the implied or actual government support for any of these companies to weaken in 2010.