Thursday 28 Mar 2024
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KUALA LUMPUR (Jan 21): National oil companies with big pockets like Petroliam Nasional Bhd (Petronas) could become more active buyers of smaller companies in the face of sustained low oil prices, said Fitch Ratings.

“Smaller companies are typically more vulnerable to low oil prices due to higher leverage, higher production costs and poorer access to external funds ... This could make such companies attractive targets for larger ones with better access to funding and technology, and which have been struggling to increase their reserve base for several years,” said Fitch in a statement today.

Aside from Petronas, Thailand’s PTT Public Company Ltd was also named by Fitch as another potential big-pocket buyer.

It noted, however, that national oil companies would mostly focus on medium-sized producers rather than small, distressed companies, as healthy balance sheets remain a priority for them.

It also said the combination of lower operating cash flows, fewer diposals and some potential acquisitions, could put major oil companies’ credit metrics under pressure.

“The impact would depend on how they respond, as some might choose to cut capex and exploration expenses, while others might decide to operate with higher leverage, which could lead to downgrades if sustained. But these changes are unlikely if oil prices quickly rebound to above US$80 a barrel, as happened in 2009,” it said.

The ratings agency also cautioned that lower oil prices could pose a hurdle to mergers and acquisitions (M&A) among major oil companies, by limiting their ability to sell assets.

“They have been increasingly reliant on disposals to finance growth or reduce their debt burden in recent years. For example, Total S.A raised around US$12 billion through assets sales in 2012-third quarter of 2014, and intends to raise US$10 billion in 2015-2017. Royal Dutch Shell Plc also has a significant disposal program,” said Fitch.

Hence, it opined their disposal strategy might need to be reconsidered if oil prices remain depressed, “because asset valuations would fall and buyers have generally been small- or medium-sized companies building local production portfolios”.

As such, these companies would find it harder to attract finance to support such deals, it said.

Fitch views a price of US$80 per barrel of crude oil would be a long-term price equilibrium, based on the marginal cost of production. At the time of writing, the benchmark Brent crude was trading at US$48.57 per barrel.

“A recovery is likely in the second half of 2015, but it is impossible to be certain of its timing. A lengthy slump would put pressure on many companies, potentially making them attractive targets; a sharper recovery in oil prices will reduce the need and opportunity for M&A,” said Fitch.

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