Fitch: Asian O&G to see sustained M&A activity; outlook stable

(Seoul/Beijing/Singapore-13 December 2011)-- Fitch Ratings says in a new report that the Asian oil and gas (O&G) sector should continue to see strong M&A activity in 2012. Although this and sustained high capex will constrain improvements to credit profiles, there is sufficient rating headroom to allow Fitch to maintain a Stable rating Outlook on the sector.

"Fitch expects M&A activity to remain high for the Asian oil and gas sector. Prospects for large M&A are especially strong for state-linked oil companies," says Steve Cox, Director in Fitch's Asia-Pacific Energy & Utilities team. Long-term energy security and gaining expertise on unconventional sources of energy are propelling investments. However, the agency notes that more than half of the large overseas reserve acquisitions (by invested amount) by Fitch-rated O&G companies in Asia over the last 18 months are not expected to provide meaningful returns in the short-term to medium-term, weighing on credit profiles. Nevertheless, robust balance sheets, including large cash reserves, or linkages to state provide financial flexibility for future M&A.

Fitch expects refining margins to moderate in 2012 from 2011 levels. Substantial refining capacity additions are expected through to 2015, a large share of which will be in Asia, mostly catering to increasing domestic demand. While the more refining-focused issuers - Reliance Industries Limited ('BBB-'/Stable) and SK Innovation Co Ltd ('BBB'/Stable) - are more affected by this, their increased level of vertical integration and improved credit profiles over the last three years have improved their ability to weather a weaker operating environment.

"Fitch believes that fuel price reforms remain challenging in most markets although consumer inflation has eased. There is, however, some prospect of loosening of price controls in selected markets," adds Mr. Cox. In Malaysia, the government has announced a gradual phasing out of gas subsidies borne by PETRONAS ('A'/Stable); however, a strong commitment to these reforms is yet to be demonstrated. In China, both Petrochina ('A+'/Stable) and Sinopec ('A'/Stable) have been incurring heavy losses on refining operations due to price controls, leading to the possibility of China re-thinking its policy on fuel pricing.

Fitch expects capex to remain high in 2012, with substantial increases in capex for some issuers, particularly Indonesia's PT Pertamina ('BB+'/Positive) and India's GAIL Limited ('BBB-'/Stable). Fitch forecasts negative free cash generation of around USD20bn for the rated (on the international scale) O&G issuers in Asia. Refinancing needs are also high with around USD50bn of debt maturities in 2012. However, given the strong cash reserves and access to capital, Fitch does not expect liquidity to be a major challenge for most issuers.

With the exception of PETRONAS, whose ratings can be negatively affected if the government of Malaysia does not reduce the financial requirements on the company, the others issuers have moderate to strong rating headroom. (ends)