Thursday, October 27, 2011

Moody's lowers AP O&G refining industry outlook to stable from positive

KUALA LUMPUR: Moody's Investors Service has changed the outlook for the oil & gas refining and marketing (R&M) industry in Asia Pacific to stable from positive as the sector has reached a peak.

In its report on Thursday, Oct 27, the international ratings agency said the stable outlook was in line with the global industry.

Moody's vice president and senior analyst Simon Wong said Moody's changed the R&M outlook to stable from positive in August due to 'only limited prospects for improvement from current levels, while risks to the downside have risen'.

He said an expected increase in refining capacity worldwide would exasperate oversupply as soon as 2012, unless sufficient demand or the rationalisation of capacity materialise. The downside factors would be a combination of a global slowdown in economic growth, and resulting in lower demand for refining products.

"Generally, in terms of challenges, except for one-off events, refining margins have limited upside potential as the structural overhang in refining capacity will persist. Nevertheless, continued demand from China and India, which is expected to exceed the global growth trend, will benefit regional refineries serving intra-Asia markets," said Wong.

Wong was speaking on the release of a Moody's special comment on the outlook for the R&M industry in Asia Pacific. The report was written by Wong and a Moody's associate analyst Nino Siu.

The report looks at issues such as key sector trends, the outlook for margins, and capex plans, as well as the implications for rated issuers. Moody's rates eight R&M companies in Asia Pacific with ratings ranging from Baa1 to Baa3.

Within the rated portfolio, seven of the issuers have stable outlooks and one has a positive outlook.

Wong said overall, the issuers' financial metrics have developed some headroom, benefiting from improved margins and utilization during 2011, but ongoing capex will hold back ratings.

"The improved metrics of the past 12 months should provide some buffer from an expected deterioration in the supply-demand balance for refined products in 2012. Some companies can also defer downstream projects, if necessary, as happened during the global financial crisis," he said.

The Moody's report expects overcapacity to constrain Asian refining margins over the next 12-18 months, but they will not drop to the extent shown during the global financial crisis.

Moody's also said a lot of new capacity will emerge specifically in 2012, and peak in 2014 and 2015, while a material rise in conversion capacity will similarly increase capacity output of gasoline, diesel, and other distillates.

Potential volatility in crude prices, as occurred during the global slowdown of 2008-2009, could disrupt management of working capital and liquidity.

However, Asian R&M companies generally have strong access to domestic banking and debt capital markets, largely mitigating liquidity risks.

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