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Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly Oil and Gas Firms Foresee Higher Demand
Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly Oil and Gas Firms Foresee Higher Demand
Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly Oil and Gas Firms Foresee Higher Demand
Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand
Primary Credit Analysts: May Zhong, Melbourne (61) 3-9631-2164; may.zhong@standardandpoors.com Lawrence Lu, CFA, Hong Kong (852) 2533-3517; law.lu@standardandpoors.com Secondary Contacts: Sangyun Han, Hong Kong (852) 2533-3526; sangyun.han@standardandpoors.com Xavier Jean, Singapore (65) 6239-6346; xavier.jean@standardandpoors.com Gloria Lu, CFA, FRM, Hong Kong (852) 2533-3596; gloria.lu@standardandpoors.com Andrew M Wong, Singapore (65) 6239-6306; andrew.wong@standardandpoors.com
Table Of Contents
Slow Recovery In Credit Metrics For Metals And Minerals Companies Sector Outlook Key Risks And Trends Ask The Analyst Oil And Gas Fortunes Will Rise And Fall In Line With Economic Conditions Sector Outlook Key Risks And Trends Ask The Analyst Related Research
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Sector Review:
Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand
(Editor's Note: This article is part of a series on the credit trends of Asia-Pacific's corporate sectors for 2014. The series responds to analytical queries received recently on a sector or a specific issuer in that sector.)
Sector Outlook
Standard & Poor's Ratings Services expects the negative credit outlook for the Asia-Pacific metals and mining sector to moderate in 2014 (see table 1). Our forecasts for the Asia-Pacific mining sector show that most companies' profitability and credit metrics should bottom out in 2013 (see charts 1, 2, and 3). Supporting this view are three key factors: 1) a ramp-up in volumes across the sector; 2) a leveling of operating margins in 2013 because of companies' initiatives to cut operating costs and improve productivity in response to low commodity prices; 3) deferral of growth capital expenditure to preserve cash.
Table 1
Nonetheless, we expect the improvement in credit metrics will be slow and modest. Commodity prices are unlikely to bounce back strongly in the next 12-18 months because of pockets of oversupply for certain minerals, such as coking and thermal coal and nickel, and metals such as steel and aluminum. The weak commodity prices would hamper a strong recovery in earnings and cash flows. In monitoring the sector's credit quality, we also focus on the liquidity levels of weaker companies, including their operating cost and working capital management, control over stripping costs, and refinancing activity.
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Sector Review: Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand
Chart 1
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Sector Review: Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand
Chart 2
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Sector Review: Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand
Chart 3
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Sector Review: Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand
How are speculative-grade companies coping with lower commodity prices, particularly in terms of their liquidity levels and refinancing risk?
The subdued outlook for commodity prices could affect some companies' access to capital markets or reduce support from lenders. In fact, we took a number of negative rating actions in the past three months because of reducing liquidity levels and heightened refinancing risk for marginal miners. The ratings on Australia's Mirabela Nickel Ltd. were lowered to 'D' because of a missed interest payment recently. Meanwhile, Indonesian miner PT Bumi Resources Tbk.'s liquidity cushion has declined materially because cash flows have reduced as a result of lower prices and declining cash balances since early 2013. We believe the company still faces significant refinancing risk in 2014. Likewise, Mongolian Mining Corp. (MMC) was downgraded, to 'B-' in August 2013, because of the company's reduced liquidity cushion and refinancing risk. We expect MMC's liquidity sources will not cover its liquidity needs over the next 12 months, despite an improvement in operating cash flows and unless the company rolls over its promissory notes and refinances its bank loans. China's coal miner Hidili Industry International Development Ltd. is facing severe liquidity issues that will hamper its
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Sector Review: Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand
ability to pay its high interest burden in the next 12 months. The negative outlook also reflects the company's limited options to repay its debt, and the possibility that it will be unable to roll over its short-term debt.
Oil And Gas Fortunes Will Rise And Fall In Line With Economic Conditions
Analysts: Lawrence Lu, Andrew Wong, Gloria Lu
Sector Outlook
The credit outlook for Asia-Pacific oil and gas companies will largely be stable for 2014. We think that refiners and marketers may face more challenges though, particularly in environments where price regulations exist. We don't project any startling developments for the sector in 2014, with most companies sticking to current business plans to keep their ratings stable at their respective levels (see table 2).
Table 2
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Sector Review: Asia-Pacific Credit Trends 2014: Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand
economy is unlikely to change in the next few years, and because scale is important for the oil companies to compete globally, the likelihood of the government breaking up such companies is remote in the near-to-medium term. That said, should the government open up the industry to allow more private capital participation, it would weaken the business risk profiles of China's three national oil companies, as it would undermine their current monopolistic positions in the domestic market.
What is Standard & Poor's view on the oil price and oil companies' spending plans?
While we routinely publish oil and natural gas price assumptions, we do not forecast oil and gas prices. We use the price assumptions for financial modeling to assess a company's credit quality and to compare credit quality among oil and gas companies. We have short-term (two-year) price deck assumptions that include a conservative discount for the hydrocarbon forward-price curves. The long-term price deck (three years and beyond) factors in supply and demand fundamentals and industry cost curves, among other factors. Typically, oil companies' spending plans are based on conservative price assumptions to evaluate the economics of a project through the cycle. Spending plans also consider future energy demand. We have seen oil and gas companies' spending plans spike by almost 80% since 2008. This increase is due to the size, complexity, and cost per barrel of oil of projects. We believe these spending plans will remain elevated, considering the growth in energy demand. However, these plans contain some discretion related to mergers and acquisitions, enabling companies to moderate expenditure should operating conditions deteriorate. That has been the case in the second half of 2013, with several companies (among them Petroliam Nasional Bhd. and PTT Public Co. Ltd.) announcing the deferral of expenditure in view of a weaker outlook for oil prices.
If the oil price declines sharply, the oil companies could face material impairment loss--how do you factor this in the rating analysis?
We view impairment losses as a balance-sheet impact only, and this does not directly affect our analysis. Instead, we look at the cash flow metrics and the impact of a sharp decline in oil prices on a company's cash flow coverage.
Related Research
Articles in the Asia-Pacific Credit Trends 2014 series: Transportation Infrastructure Faces Policy Uncertainty; Utilities Deal With High Energy Costs And Green Power, Dec. 4, 2013 Still Robust Domestic Growth and Steady Financial Profiles Underpin Our Mostly Stable Outlook On Indonesia's Corporate Sector, Oct. 30, 2013 Middle Classes Fuel Consumer Products; Retail To Keep Doing It Hard; Gaming On A Roll, Oct. 30, 2013 Real Estate Developers Wrestle With Regulatory Curbs; REITs Hunt For M&As, Oct. 29, 2013 Tech Firms Focusing On Asia And Smart Devices Will Outperform, Oct. 28, 2013 Telcos Look To The Cloud In Search Of Growth, Oct. 27, 2013
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