Middle East oil firms to borrow less next year

Debt issuances by the Middle Eastern oil companies will slow down next year, thanks to strong internal cash from high oil prices, as companies will mainly go for bank loans, Fitch Ratings analysts said.

It said improved oil income will lessen need for the external funding by the regional energy companies in 2011.

Jeffrey Woodruff, Senior Director for Energy, Utilities & Regulation at Fitch Ratings, said Middle Eastern oil and gas companies will not be overly reliant on debt in 2011. “With oil prices having steadily risen since Q1 2009, Fitch anticipates that oil and gas producers will be better able to fund capex from internally generated funds. Borrowings may increase, however, to take advantage of M&A opportunities that present themselves in 2011.”

International Monetary Fund has projected that oil price will average $90 per barrel next year on the back strong demand consumption by the Asian countries.

Woodruff said bank lending will likely be the first choice for regional oil companies followed by conventional Western debt instruments. “We have not really seen oil and gas companies utilising Sukuk (Islamic bond) as a funding method,” the London-based analyst this Emirates 24l7.

Recently, debt issuances have come from Afren, MB Holding Company and Abu Dhabi-based International Petroleum Investment Company (Ipic). Most of the debt raised was meant for refinancing and meet capital expenditure needs of the companies.

Fitch anticipates that any additional debt financing in 2011 by Abu Dhabi-based Ipic will be used for potential acquisitions in the refining and petrochemical sector.

The report predicted that merger and acquisition activity in Europe, Middle East and Africa (EMEA) oil and gas in 2011 could increasingly come from emerging market companies making acquisitions in both developed as well as other emerging markets. As the economy picks up, emerging market companies could be increasingly interested in improving their market positions. Assets are cheap and available for sale, and emerging market companies suffered less than developed market counterparts in the downturn.

Fitch’s global rating outlooks for oil and gas companies showed improvement in the third quarter this year compared to Q3 2009 and a noticeable increase in stable outlook.

On the oil production front, oil production outside Opec will probably remain depressed in 2011. Countries such as Norway and the UK are struggling to stem declining production rates. This is a major challenge for the industry as a whole, with global crude oil production decline rates now running at around six per cent per year, Fitch added.

Data by the ratings agency showed that developed countries oil consumption contracted by more than five per cent from 2007 to 2009 in the wake of the economic recession brought on by the financial crisis. Iceland and Ireland experienced some of the largest reductions in oil consumption (around 15 per cent) as their economies were particularly hard hit by the financial crisis. Continued sluggish economic activity and weak industrial recovery prospects in 2011 are likely to lead to a continuation of this trend. Fitch anticipates developed markets will increase oil consumption at slower rates if economic activity remains largely subdued in 2011.

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