Refiners’ earnings to shrink marginally in 2Q, says Moody’s


Falling margins may hurt oil refiners in the second-quarter of the year (2Q17) but volatility in crude prices is seen as a boon for oil and gas (O&G) explores, Moody’s Investors Service Inc noted.

In its latest edition of the Asia O&G report, Moody’s expects refiners’ earnings to decline marginally in the 2Q amid weaker refining margin environment.

It expects Asian investment-grade exploration and production players, particularly national oil companies, to be well-positioned to withstand the volatility in oil prices given their robust liquidity profiles and strong access to capital.

The report noted month-on-month volatility in refining margins was driven by an increase in supply in May, after scheduled refinery maintenance.

“In June, strong margin performance was supported by strong fuel oil crack spread,” it added.

As of July 3, Malaysia’s national oil firm Petroliam Nasional Bhd (Petronas) was given an ‘A1’ rating with a ‘Stable’ outlook in Moody’s list of rated O&G issuers.

Based on the report’s rated O&G portfolio, for 2Q, there were three positive rating actions and five negative rating actions.

The ‘Positive’ rating actions were on upstream producers and refiners, including GS Caltex Corp’s outlook revision to ‘Positive’ from ‘Stable’ reflecting the credit rating agency’s expectation the company will continue to improve its capital structure through debt cuts.

The five negative rating actions were downgrades of China-based O&G companies following the down- grade of China’s sovereign rating.

Moody’s assistant VP and analyst Rachel Chua expected Asian investment-grade exploration and production players would withstand the volatility in view of their robust liquidity profiles and strong access to capital.

“Furthermore, upstream acquisitions will likely pick up, as oil prices stabilise within our anticipated band of US$40 (RM172) to US$60 per barrel (bbl) for both Brent crude and West

Texas Intermediate (WTI), with companies seeking opportunities to buy assets at relatively low prices to strengthen their production and reserves profiles,” Chua added.

Moody’s said upstream earnings would continue to recover despite volatility.

Dubai crude price declined in 2Q17 to average US$50/bbl from US$53/bbl during the preceding three months.

After climbing to US$55/bbl in April, the regional index was range bound between US$48/bbl and US$53/bbl in May, before gradually declining to US$42/bbl at the end of June.

“The volatility of Dubai crude price in April and May was largely attributable to bearish market sentiments on the back of uncertainty regarding the extension of OPEC supply cuts,” it said.

The rating agency said, while OPEC committed in May to sustain production cuts till March 2018, high global oil inventories amid additional US oil supply continued to weigh on June crude prices.

“We continue to assume that oil prices will remain within the US$40 to US$60/bbl band for both Brent and WTI.

“We do not expect a substantial rise in oil prices, with companies largely continuing to be focused on operating efficiency and costs,” it said.

Despite the volatility, Moody’s said earnings and cashflows of upstream players in Asia will increase in 2017 from a year ago given the more supportive price environment.