Fitch Ratings uses a base-case assumption that oil prices will average USD75 per barrel (bbl) for Brent blend in 2024, down from USD80/bbl in 2023, for modelling purposes in our credit rating assessments. However, we believe ratings for downstream oil companies among our rated issuers in APAC should be resilient if oil prices remain in the recent range of USD90-USD100 through 2024. Upstream and integrated issuers will generate higher profits, though these could be offset by windfall taxes.
Standalone credit profiles (SCPs) could be affected for some downstream issuers if crude prices remain high, but Issuer Default Ratings (IDRs) in the oil sector are all linked – directly or indirectly – with those of the relevant sovereign or government.
We believe oil-sector issuers in India and Taiwan with heavy downstream exposure may experience margin pressure if oil prices are sustained at levels close to USD100/bbl through 2024. We believe governments in both markets would be likely to opt to limit the pass-through of higher crude costs in order to reduce the inflationary effect and impact on households – particularly as elections are due next year in both countries.
Among Indian oil marketing companies (OMCs), Hindustan Petroleum Corporation Limited (HPCL; BBB-/Stable) has low SCP headroom at ‘bb’ – given its high capex intensity and investments in joint ventures – and sustained underperformance on margins could be negative for the SCP. Nonetheless, the Indian government has a record of letting OMCs recoup losses incurred during periods of high crude prices when crude prices are lower, even over protracted timeframes. The government’s announced plan to provide capital support of INR300 billion to the OMCs in the financial year ending March 2024 should also support their credit profiles.
Sustained high global energy prices could prevent the return to profitability that our baseline projects for Taiwan’s CPC Corporation (AA/Stable) in 2024. CPC’s ‘bb-’ SCP is constrained by high leverage associated with large social undertakings and investment plans, but financial flexibility remains strong, with liquidity supported by access to domestic banks and the bond market. As in India, the government could also opt to provide capital support.
China National Petroleum Corporation (A+/Stable) and China Petroleum & Chemical Corporation (Sinopec, A+/Stable) have robust headroom in their SCPs due to strong balance sheets. In a scenario with oil prices averaging around USD100/bbl in 2024, we believe margins at downstream operations would come under pressure as the companies would have to absorb part of the higher crude cost under China’s refined product-pricing mechanism. However, higher upstream earnings would help to mitigate downstream pressure.
Most rated issuers in south-east Asia plan high capex in the next three or four years, investing more in their relatively mature upstream assets. Generally, we believe higher crude prices would help cushion the impact of strong capex on financial profiles.
Refined petroleum product prices are regulated to varying degrees in Malaysia and Indonesia. However, upstream revenues dominate earnings for Malaysia’s Petroliam Nasional Berhad (PETRONAS, BBB+/Stable) and the government compensates fuel retailers through subsidies, so higher crude prices are typically beneficial. Their net effect for earnings at PT Pertamina (Persero) (BBB/Stable) should also be positive, provided the Indonesian government maintains its recent record of relatively timely compensation payments, offsetting the cost of selling fuel at subsidised prices.
Downstream product prices are relatively more liberalised in Vietnam, which should facilitate the pass-through of higher crude costs. Thailand’s PTT Public Company Limited (BBB+/Stable) has relatively limited headroom at its SCP due to a reserve life close to seven years, but we believe the Thai authorities’ system for controlling retail fuel prices should not weigh on earnings.
Source: Fitch Ratings