Government Links To Oil And Gas Companies Provide Support, But With Some Drawbacks

Primary Credit Analyst: Andrew M Wong, Singapore (65) 6239-6306; andrew.wong@standardandpoors.com Secondary Contact: Lawrence Lu, CFA, Hong Kong (852) 2533-3517; law.lu@standardandpoors.com

Table Of Contents
How Do We Define GREs? What Drives The Strength Of Government Ties In Emerging Markets? Government Links Are Generally Credit Positive But They Can Have Some Drawbacks A Double-Edged Sword Related Criteria And Research

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Government Links To Oil And Gas Companies Provide Support, But With Some Drawbacks
Oil and gas companies in emerging markets tend to have strong relationships with governments, which is generally credit positive for these companies. However, these relationships can also have some drawbacks. About 11% of the oil and gas companies that Standard & Poor's Ratings Services rates globally are government-related entities (GREs), as our criteria define the term. This ratio increases to about 35% for rated oil and gas companies in Asia-Pacific, Latin America, and Europe, the Middle East, and Africa (see charts 1, 2, and 3). While the rated oil and gas GREs globally represent a diverse mix of governments and companies, and the strength and durability of these relationships vary, some common themes have emerged. Overview Government relationships with oil and gas companies tend to be stronger in emerging markets. These government relationships are generally credit positive for the GREs. However, government intervention can also weaken the profitability, leverage, and cash flows of these companies.

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Government Links To Oil And Gas Companies Provide Support, But With Some Drawbacks

Chart 1

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Government Links To Oil And Gas Companies Provide Support, But With Some Drawbacks

Chart 2

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Government Links To Oil And Gas Companies Provide Support, But With Some Drawbacks

Chart 3

How Do We Define GREs?

GREs are enterprises that are potentially affected by extraordinary government intervention during periods of stress, according to our criteria. These entities are often under partial or total control of a government (or governments) and contribute to implementing government policies or delivering key services. We may also classify companies with little or no government ownership as GREs if we believe they might benefit from extraordinary government support, whether because of their systemic importance or their critical role as providers of crucial goods and services.

What Drives The Strength Of Government Ties In Emerging Markets?

In our view, the two key factors behind the high proportion of GREs among rated oil and gas companies in emerging markets is government ownership and energy security. Governments in emerging markets typically maintain majority or full ownership in national oil companies. This is because of the strategic importance of these companies to government policies and their significant contribution to the country's economic growth and the government's finances. Emerging markets also typically have growing energy demand and weakening supply. For instance, oil

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Government Links To Oil And Gas Companies Provide Support, But With Some Drawbacks

production in Asia-Pacific grew only 0.7% in 2012 from 2011, while consumption grew 3.7% (Source: BP Statistical Review Of World Energy 2013). These factors support our assessment of the importance of the "role" and the strength of the "link" of these GREs with their respective governments. Our criteria define the "role" of each company as "critical," "very important," "important," or of "limited importance" according to the severity of the effect that a default of the GRE would have on the government or the local economy. For instance, the GRE may implement a key national policy, provide an important public service, or influence the proper functioning of an important economic sector. We define a GRE's "link" with the government as "integral," "very strong," "strong," or "limited" according to the degree to which the government determines the GRE's strategy and its operations and by the level of government supervision. We consider factors such as government ownership in the GRE, the existence of a partial or ultimate government guarantee of the GRE's obligations, and reputational risk to the government should the GRE default. In assessing the link, we also factor in our opinion of the government's general propensity to intervene in the GRE sector in a credit-supportive and timely manner. We combine our opinions of the role and link into a likelihood of extraordinary government support. We define extraordinary as either "discrete" or "temporary" (as opposed to ongoing), entity-specific (as opposed to systemwide), and often related to financial stress at the GRE level.

Government Links Are Generally Credit Positive

We assess the overall likelihood of extraordinary government support for oil and gas GREs at the upper end of the scale, generally from "very high" to "almost certain" (see chart 4). Such support is credit positive for the GREs and, on average, translates into a one to two notch uplift to the final rating above the GRE's stand-alone credit profile (SACP) (see chart 5).

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Government Links To Oil And Gas Companies Provide Support, But With Some Drawbacks

Chart 4

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Government Links To Oil And Gas Companies Provide Support, But With Some Drawbacks

Chart 5

Government relationships also reflect "ongoing" government interactions and support. We incorporate these factors into each GRE's SACP. This ongoing government support typically enhances the competitive position of GREs by boosting their market positions and helping them enhance their scale in domestic economies. Ongoing support also improves leverage and liquidity if the company benefits from routine capital injections. Moreover, it provides solid financial flexibility to GREs by enhancing their access to external financing. About 65% of the GRE's have SACPs in the investment grade. In comparison, 53.4% of total global corporate entities that Standard & Poor's rates as of Dec. 31, 2012, are investment grade.

But They Can Have Some Drawbacks

Though they can offer credit benefits, government relationships also create the potential for negative government intervention. This is because GREs tend to be highly sensitive to sovereign influence and actions, which can weaken their profitability, leverage, and cash flows. Negative government intervention can also reduce a company's ability to internally fund its capital expenditures. Examples of such intervention include: Government control or regulation of domestic prices, which can sometimes be below the cost of production. Requirements that GREs invest in strategic, but low-profit and noncore, assets.

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Government Links To Oil And Gas Companies Provide Support, But With Some Drawbacks Higher taxes and dividends. Requirements that GREs contribute to national development funds. Requirements that they share profits with or support/subsidize other strategic and less profitable GREs. For example, Indonesia's PT Pertamina (Persero) has a substantial public service obligation to distribute fuel in the domestic market at government-designated below-market prices. Pertamina therefore has weaker margins than its peers. Similarly, India's Oil and Natural Gas Corp. Ltd. contributes to the funding of the government's oil subsidy. The SACP of Korea National Oil Corp. has deteriorated over the past few years because of the company's increasing debt-funded upstream investments to serve its government mandate to improve Korea's energy self-sufficiency. And in Latin America, the high level of taxes that Petroleos Mexicanos pays to the Mexican government continues to burden the company's finances. In such cases, the sovereign credit rating constrains the rating on the GRE. For instance, the foreign currency rating on Malaysia's Petroliam Nasional Bhd. is three notches below its SACP of 'aa-' to reflect the company's high sensitivity to government intervention.

A Double-Edged Sword
The strong influence of government relationships with oil and gas GREs reinforces, in our opinion, the strategic importance of these companies to their respective sovereigns. The extent of their influence on our GRE ratings depends on the strength and durability of both the GRE's role and the sovereign link to the entitywhich can come with both pluses and minuses.
Table 1

Rated Oil And Gas Government-Related Entities

Related Sovereign LC government rating; Korea Mexico Mexico Mexico AA-/Stable/A-1+ A-/Positive/A-2 A-/Positive/A-2 A-/Positive/A-2 Stand-alone credit profile Role bb bbbbbbbbbCritical Critical Critical Critical Overall likleyhood of support

Issuer name

Issuer LC rating; Issuer FC rating

Link

Korea National AA-/Stable; A+/Stable Oil Corp. Petroleos Mexicanos MGI SUPPLY LTD PMI Norteamerica S.A. de C.V. P.M.I. Trading Ltd. PT Pertamina (Persero) Petroleos de Venezuela S.A. Petroliam Nasional Bhd. KazMunayGas NC JSC A-/Positive; BBB/Positive A-/Positive; BBB/Positive A-/Positive; BBB/Positive

Integral Almost certain Integral Almost certain Integral Almost certain Integral Almost certain Integral Almost certain Integral Almost certain Integral Almost certain Integral Almost certain Very strong Extremely high

A-/Positive; BBB/Positive BB+/Stable; BB+/Stable B/Negative; B/Negative

Mexico Indonesia Bolivarian Republic of Venezuela Malaysia Kazakhstan

A-/Positive/A-2 BB+/Stable/B B/Negative/B

bbbbb+ b+

Critical Critical Critical

A/Stable; A-/Stable BBB-/Stable; BBB-/Stable

A/Stable/A-1 BBB+/Stable/A-2

aab+

Critical Critical

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Table 1

Rated Oil And Gas Government-Related Entities (cont.)

CNOOC Ltd. China National Offshore Oil Corp. China Petrochemical Corp. China Petroleum & Chemical Corp. China National Petroleum Corp. OAO AK Transneft AA-/Stable; AA-/Stable AA-/Stable; AA-/Stable China China AA-/Stable/A-1+ AA-/Stable/A-1+ a a Critical Critical Very strong Very strong Very strong Very strong Extremely high Extremely high Extremely high Extremely high

A+/Stable/A-1; A+/Stable/A-1

China

AA-/Stable/A-1+

a-

Critical

N/A; A+/Stable

China

AA-/Stable/A-1+

a-

Critical

AA-/Stable; AA-/Stable

China

AA-/Stable/A-1+

aa-

Critical

Very strong Very strong Very strong Very strong

Extremely high Extremely high Extremely high Extremely high

BBB/Stable; BBB/Stable

Russian Federation Thailand Azerbaijan

BBB+/Stable/A-2 A-/Stable/A-2 BBB-/Stable/A-3

bbbbbb bb

Critical Critical Critical

PTT Public Co. BBB+/Stable; BBB+/Stable Ltd. State Oil Company of Azerbaijan Republic Gazprom OAO Empresa Nacional del Petroleo Petroleum Co of Trinidad & Tobago Ltd The National Gas Co. of Trinidad & Tobago Ltd. BB+/Stable; BB+/Stable

BBB/Stable/A-2; BBB/Stable/A-2 N/A; BBB-/Stable

Russian Federation Chile

BBB+/Stable/A-2 AA+/Stable/A-1+

bbbb

Critical Very important Very important Very important

Very strong Very strong Very strong Very strong

Extremely high Very high

BBB/Stable; BBB/Stable

Trinidad and Tobago Trinidad and Tobago

A/Stable/A-1

bb-

Very high

A-/Stable; A-/Stable

A/Stable/A-1

bbb-

Very high

Administracion BB/Stable; BB/Stable Nacional de Combustibles Alcohol y Portland Ecopetrol S.A. Oil Company Rosneft OJSC Petroleo Brasileiro S.A. - Petrobras Oil and Natural Gas Corp. Ltd. INPEX Corp. AREVA BBB/Stable; BBB/Stable BBB/Stable; BBB/Stable BBB/Negative; BBB/Negative

Uruguay

BBB-/Stable/A-3

b+

Very important

Very strong

Very high

Colombia Russian Federation Brazil

BBB+/Stable/A-2 BBB+/Stable/A-2 A-/Negative/A-2

bbbbb bbb-

Very important Very important Very important Very important Very important Important

Very strong Very strong Very strong Very strong Strong Very strong

Very high Very high Very high

BBB-/Negative; BBB-/Negative

India*

BBB-/Negative/A-3

Very high

A/Stable/A-1; A/Stable/A-1 BBB-/Stable/A-3; BBB-/Stable/A-3

Japan* France*

AA-/Negative/A-1+

bbb+

High High

AA+/Negative/A-1+ bb-

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Government Links To Oil And Gas Companies Provide Support, But With Some Drawbacks

Table 1

Rated Oil And Gas Government-Related Entities (cont.)

KazMunaiGas Exploration Production JSC Statoil ASA PTT Exploration and Production Public Co. Ltd. Eni SpA MOL Hungarian Oil and Gas PLC Urenco Ltd. BBB-/Stable; BBB-/Stable Kazakhstan BBB+/Stable/A-2 bb+ Very important Strong High

AA-/Stable/A-1+; AA-/Stable/A-1+ BBB+/Stable; BBB+/Stable

Norway Thailand

AAA/Stable/A-1+ A-/Stable/A-2

a+ bbb+

Important Important

Strong Strong

Moderately high Moderately high

A/Watch Neg/A-1; A/Watch Neg/A-1 BB+/Negative; BB+/Negative

Italy* Hungary

BBB/Negative/A-2 BB/Negative/B

a bb+

Important Important

Limited Moderate Limited Moderate

BBB+/Stable/A-2; BBB+/Stable/A-2

Germany*

AAA/Stable/A-1+

bbb+

Limited Limited Low importance

LC--Local currency. FC--Foreign currency. *Unsolicited rating. Wholly owned subsidiaries of Petroleos Mexicanos. The ratings on these companies are equalized with that on the parent because we view the operations of these companies to be integrated with the parent's. N/A--Not applicable.

Related Criteria And Research

Issuer Ranking: Asia-Pacific Oil And Gas Companies, Strongest To Weakest, May 23, 2013 Issuer Ranking: U.S. Oil And Gas Exploration And Production Companies, Strongest To Weakest, April 18, 2013 Industry Report Card: The Latin American Oil And Gas Sector Should Maintain Stable Credit Quality, April 15, 2013 Credit Trends: Ratings Distribution In Emerging And Developed Markets, Including The U.S. And Europe, As Of Fourth-Quarter 2012, March 14, 2013 Issuer Ranking: EMEA Oil And Gas Industry, Strongest To Weakest, Feb. 18, 2013 How State Ownership Affects Latin American And Caribbean Oil And Gas Companies, Aug. 27, 2012 Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010

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