Japex gets credit boost from axed LNG project

by MARK RAO / Pic by BLOOMBERG

The cancellation of Petroliam Nasional Bhd (Petronas)-led liquefied natural gas (LNG) project in British Columbia (BC), Canada, is a credit boost to Japan Petroleum Exploration Co Ltd (Japex), as the Japanese oil and gas (O&G) exploration and production (E&P) company avoids the risk of a future leverage spike.

Moody’s Investors Service Inc rated Japex ‘Baa1 Stable’, with the terminated Pacific NorthWest LNG development on BC’s Lelu Island lowering the company’s future leverage.

“We previously had not incorporated the full magnitude of the potential increase in leverage in our assessment on Japex, a minority owner of the planned facility, given the event risk entailed amid the low gas price environment and uncertainty around timing,” the credit rating agency said in its report last week.

“The elimination of the overhang of future leverage increase is credit positive for Japex.”

Petronas had cancelled the C$36 billion (RM123.55 billion) valued LNG project last week due to the weak global LNG prices and the industry downturn.

Japex’s stake in the development comes from its 10% interest in Progress Energy Canada Ltd, a joint-venture company led by Petronas and the operator of the North Montney upstream project, which would transport the produced natural gas to the Pacific NorthWest LNG site.

The second-largest E&P company in Japan participated in the large-scale project since 2013 for the purpose of producing LNG from its shale gas reserves in North Montney to secure long-term supply of the gas to its domestic market.

“The project cancellation, nonetheless, comes as Japex is seeking to reduce its reliance on E&P, integrate its upstream and downstream businesses and expand its power-generation operations,” Moody’s said.

The rating firm stated the company planned to export the produced LNG from the terminated project to its Soma LNG terminal in Fukushima, Japan.

It said the terminal is scheduled to commence operations in March next year to leverage on Japex’s gaspipeline infrastructure in Northern Japan and to fuel natural-gas power generation at the Soma Port.

“We expect the Soma terminal can procure LNG on the spot market, or from alternate sources given the cancellation of the Pacific NorthWest project.”

The immediate financial impact of the terminated LNG project — the second-terminated LNG project in Canada this year — is expected to be minimal with Japex estimating losses at around ¥8.7 billion (RM339.3 million).

This includes the ¥5.5 billion cost of pipeline-construction termination and ¥3.2 billion non-operating expense of equity method investment loss.

Moody’s said Japex can pay the ¥5.5 billion cash outlay without materially hindering its liquidity, with the Japanese O&G firm retaining ¥109.5 billion of cash on hand as of March 31 this year.

“We expect the ¥5.5 billion payment will reduce the company’s adjusted retained cashflow and debt metric by about 3%, compared to what the metric would have otherwise been.”

“We now expect retained cashflow and debt of about 24% to 27% for the fiscal year ending March 2018 (FY18) — the metric is still well above what could lead to a downgrade,” it added.

Moody’s nonetheless said Japex is still susceptible to downward rating pressure if the Japanese government’s sovereign rating is downgraded, or if the company’s leverage and cashflow remains weak at a retained cashflow and debt below 20%.

Japex raked in ¥207.1 billion for FY17.