Asia Pacific's E&P, R&M and petrochemical sectors to severely affected in subsequent 12-18 months

18-Mar-09

Asia Pacific's exploration and production (E&P), refining and marketing (R&M) and petrochemical sectors are to be severely affected over the next 12-18 months as per Moody's Investors Service. The abrupt fall in energy prices has hit margins and cash flow at E&P issuers, while rapidly falling demand and margins has squeezed profits at R&M and petrochemical issuers, which held higher-cost inventories and face new capacity coming on stream. Despite the E&P sector's negative outlook, ratings on investment-grade E&P companies in the region are likely to remain stable as their adequate-to-strong financial profiles enable them to withstand such energy-price volatility. However, for speculative-grade issuers, downward rating pressure will emerge from their reduced cash flows, the need to replace reserves, and large capex requirements. The fall in demand for refined products and the advent of new refining capacity in the region will keep refining margins under pressure and weigh on the operating performance of most refineries. The negative industry outlook in the R&M sector is due to demand changes that appear to be structural and enduring, as well as looming over-supply. As a result, Lam notes that refining margins could drop to low-cycle levels, which could weigh on the ratings and outlooks for some Asian refineries during the next 12 months. However, Moody's forecast a stable outlook for India's Reliance Industries (BAA2 rating) and Indian Oil Corporation (BAA3 rating). The negative outlook in the Asia-Pacific petrochemical sector reflects petrochemical manufacturers' deteriorating margins, which in turn result from weak demand, a slowing economic environment, and new capacity coming online in the Middle East and China in 2009 and beyond. In response to weakening global demand, Asia Pacific's petrochemical companies are rapidly shedding inventory and delaying their procurement of feedstock, which has amplified the sector's current down-cycle. This amplification has occurred during the last few months in Asia's petrochemical market.