Higher oil prices, but regulatory risk for oil/gas sector evolving in Australia, China, Indonesia: S&P

May 21, 2018

HONG KONG - Rallying oil prices are a credit positive for most Asia-Pacific oil companies, boosting cash flows, but spending plans should remain relatively conservative, according to S&P Global Ratings.

"We don't expect (higher prices) to lead to a hunt for more resources, as during the last upcycle," says S&P Global Ratings credit analyst, Danny Huang.
 
"Given changing structural demand dynamics for oil and the memory of the last commodities bust, we expect many countries to maintain fairly conservative financial policies."
 
S&P Global Ratings has raised its assumptions for the Brent oil price benchmark, but they remain below spot prices which last week breached US$80 a barrel (bbl).
 
“We now assume Brent to average US$65/bbl for the rest of 2018
and US$60/bbl for 2019, up from US$60/bbl and US$55/bbl, respectively. We
maintain our long-term oil price assumption at US$55/bbl,” S&P says.
 
“Australian and Japanese companies are spending less as several major liquefied natural gas projects near completion.
 
“Chinese, Indian and Thai companies are increasing capital expenditures, but in a controlled manner. Indonesian and Korean companies are more likely to significantly boost spending in order to increase reserves and extend their downstream value chains respectively.
 
"Acquisition appetite remains controlled for now but may heat up if high oil prices persist," said S&P Global Ratings credit analyst, Vishal Kulkarni. Australian and Indian companies are more active in terms of M&As compared with other countries, he added.
 
“In particular, India is relatively active in reserves acquisitions in order to meet projected long-term energy demand needs. We also expect further State-guided domestic asset reshuffles as the regulator seeks to streamline the industry and carve out oil majors.”
 
S&P Global Ratings does not expect that higher cash flows will translate into bigger payout ratios for shareholders.
 
"Most regional sector companies are flexible with their dividend policy, and dividend payments will be commensurate with their cash flow," said Huang.
 
S&P said it regarded regulatory risk as a potential game-changer in the oil and gas industries.
 
“In our view, regulatory risk evolving in Australia, China, and Indonesia can potentially alter the balance-sheet health of oil and gas companies in these countries,” it said. www.stndardandpoors.com (ATI).