Bangkok--23 Apr--Fitch Ratings
Fitch has today commented that the material reduction in Santos' revenue in Q109 illustrates the commodity price risk faced by most oil and gas exploration and production (E&P) companies. Although Santos' Q109 production remained broadly constant compared to Q108 and Q408, revenue declined by 15% compared to Q108 and 17% compared to Q408. The significant reduction in revenue was largely due to the fall in international oil prices; Santos realised an average of AUD71.2 per barrel of oil in Q109, 33% lower than in Q108. This fall would have been worse if the AUD had not weakened significantly against the USD over this period.
"The Santos results highlight the vulnerability of cash flows in upstream oil and gas companies to volatile oil prices," notes Janet Willoughby, Associate Director in Fitch's Asia Pacific Energy and Utilities team. "This price risk moderates the credit ratings of exploration and production companies even if they have very strong financial metrics," adds Ms. Willoughby.
Santos' Q109 results illustrate Fitch's expectation that the lower oil prices in 2009 will lead to a significant deterioration in Asia-Pacific E&P companies' credit metrics. However, the agency generally does not expect this to lead to ratings downgrades as upstream oil and gas companies in this region are generally well-placed to weather the economic storm given their strong cash flows generated during the commodity price boom of the last few years and have significant financial flexibility.
In addition, Fitch rates through the economic cycle, which is to say the agency does not automatically upgrade during periods of high oil prices and automatically downgrade when prices fall. In the Asia-Pacific region all of Fitch-rated E&P companies have Stable Outlooks, except for government-owned companies whose ratings are derived from a sovereign rating on Negative Outlook.
In the last few years, E&P companies in the US and Europe have used 'excess' cash flows generated by high oil prices for shareholder-friendly activities such as share buybacks and special dividends. However, many North American energy firms are now in the position where internally generated cash flows are at, or below, the level of capital expenditure required to maintain existing reserve and production profiles. As a result, Fitch expects North American E&P businesses to continue to cut investment with the potential for additional leverage as most firms may not be able to cut capital expenditure levels fast enough. Declining production and reserve levels remain possibilities stemming from reduced reinvestment rates and lower commodity price induced reserve revisions.
These concerns are less of an issue in the Asia Pacific region. Many of the E&P companies in the region are national oil companies that operate in the interests of the sovereign. Independent upstream companies such as Santos and Woodside ('BBB+'/Stable) in Australia did not generally return windfall gains to shareholders, and have preserved cash flows for development investment, particularly in liquefied natural gas (LNG) and coal seam methane projects.
As at 31 December 2008, Santos had a strong level of liquidity with AUD1.5bn of cash, AUD800m undrawn committed credit lines and minimal near-term maturities. The company's liquidity was boosted by the AUD2.0bn received in 2008 from Petronas ('A'/Stable) for the sale of a 40% share in the Gladstone LNG project. Santos' FYE08 FFO gross leverage was a modest 1.8x and FY08 FFO interest cover was strong at 9.7x. Fitch believes that Santos' credit profile will not be materially affected by lower oil prices in 2009. However leverage is likely increase in the medium term due to material capex required by both the Gladstone and PNG LNG projects, especially if oil and gas prices remain weak.
Contact: Janet Willoughby, Brisbane +61 7 3222 8614 or Steve Durose, Sydney +61 2 8256 0307.
Media Relations: Shivani Sundralingam, Singapore, Tel: + 65 6796 7215, Email: [email protected].
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