Bangkok--14 Feb--Moody's
Moody's Investors Service says that the outlook for Asia Pacific's oil & gas exploration and production (E&P) sector is stable.
"A significant rebound in oil prices since their trough is supporting growth in the profits and cash flow of E&P players," says Renee Lam, a Moody's Vice President and Senior Analyst.
"The oil price recovery has been driven by financial investment demand, as well as physical oil stock demand," says Lam, who was speaking on the release of Moody's latest outlook -- which she authored -- on the sector.
Moody's rates eight E&P companies in Asia Pacific (range: B2 to Aa3), and two integrated oil and gas companies which have heavy exposure to E&P (A1 and A3).
Furthermore, continued strong demand growth in non-OECD countries, especially from China and India, provides medium- to long-term support to oil and gas prices. China's oil demand is forecast to grow at a CAGR of 6.35% over 2010-2011, such that its portion of global demand will increase to 10.7% in 2011.
However, continued acquisitions and capital expenditure remain a key risk.
"Many Asian E&P players are sovereign-owned, directly or indirectly, and they are keen to boost reserves through acquisitions for strategic reasons," says Lam.
There is also a trend to purchase unconventional assets -- such as shale gas and oil sands -- as most global oil and gas reserves are approaching maturity, and technological advancements have been improving the project economics of the business.
"These unconventional assets require higher up-front capital investments and a longer exploration and development period before commercial production is realized," says Lam.
Moody's also believes that the sector will face increasing cost pressures.
"With the recovery in oil prices, Asian companies will have their cash margins squeezed due to an increasing cost base, although they enjoy better cost structures when compared to their US and European counterparts," says Lam.
Finding and development costs will increase, driven by the growth in investment and capital expenditure budgets. Debt issuance is also expected to rise.
"As most of these E&P players will increase their investments in the next18 months, we expect the sector's leverage to increase," says Lam.
Finally, regulatory issues, particularly on pricing and environmental concerns, will continue to impact the sector.
The full report is entitled Asia-Pacific Exploration and Production Sector. It can be accessed on www.moodys.com