Asia Pac oil and gas companies to overcome liquidity pressures

Fluctuating crude prices, a potential global economic slowdown, heavy investments, and liquidity pressures present challenges to oil and gas companies in Asia-Pacific. But Standard & Poor's Ratings Services expects these companies to successfully navigate the potential hurdles. In a recently published industry report card titled "Strong Demand Will Enable Asia-Pacific Oil And Gas Companies To Overcome Price, Investment, And Liquidity Pressures," Standard & Poor's said that it expects the performance of the oil and gas companies that it rates in Asia-Pacific to remain broadly stable reflecting the strong regional demand for energy.

"Exploration and production companies have benefited from improved prices in 2011 compared with 2010. But our credit outlook for 18% of the E&P companies is negative, largely due to the scope, scale, and funding of their investment projects," said Standard & Poor's credit analyst Andrew Wong. "All the refining and marketing companies have stable outlooks. Their profitability, however, varies depending on the regulatory environment in which they operate, the stage at which they are in the investment cycle, and the complexity of their refining assets."

The report noted that crude prices are likely to remain volatile in the next nine to 12 months with some potential for weakening. In addition, demand could slow down given the uncertainty surrounding the pace of global economic growth. This uncertainty is largely attributable to the European sovereign debt crisis, weaker economic data from the U.S., moderating economic growth in China, and inflation and rising interest rates throughout the Asia-Pacific region. Nevertheless, most E&P companies in Asia-Pacific will be able to weather some weakening in oil and gas prices in general at the current rating levels.

"With high investment plans and price volatility likely to continue, the criticality of adequate liquidity and access to external financing is increasing," said Mr. Wong. "Overall, we view the liquidity positions of the oil and gas companies that we rate in Asia-Pacific as either strong or adequate (86% of rated peers)."

Nevertheless, Standard & Poor's believes that most companies will effectively manage their liquidity through sufficient cash balances, strong operating cash flows, or solid access to external financing attributable to their strong business position or government linkage. Overall, oil and gas companies in Asia-Pacific should benefit from the increasing demand for oil while supply remains tight.