(The following was released by the rating agency)
-- We revised the stand-alone credit profile (SACP) for INPEX to ‘bbb+’ from ‘a-', reflecting our view that large capital investments it is due to make on its Ichthys LNG project are highly likely to prevent it from maintaining measures of credit quality commensurate with a ‘a-’ SACP in the medium to long term.
-- We revised our view of the likelihood of extraordinary government support to “high” from “moderately high.”
-- As a result, we revised to stable from negative the outlook on the long-term corporate credit rating on INPEX and affirmed our ‘A’ long-term and ‘A-1’ short-term corporate credit ratings.
-- The stable outlook reflects our assumption that the Ichthys project will not suffer material delays or cost overruns and its financial risk profile will not deteriorate materially over the next two years. In addition, according to our criteria for government-related entities (GREs), we do not expect that lowering our long-term sovereign rating on Japan (AA-/Negative/A-1+) to ‘A+’ would have negative implications for our ratings on INPEX.
TOKYO (Standard & Poor‘s) Sept. 26, 2012--Standard & Poor’s Ratings Services today revised to stable from negative the outlook on the long-term corporate credit rating on INPEX Corp. At the same time, we affirmed our ‘A’ long-term and ‘A-1’ short-term corporate credit ratings on the company.
The outlook revision and rating affirmation are the result of the following changes we have made to our assessments:
-- We revised the stand-alone credit profile (SACP) for the company to ‘bbb+’ from ‘a-'; and
-- We revised the likelihood of extraordinary government support to “high” from “moderately high.”
The SACP revision primarily reflects our view that INPEX’s financial risk profile will weaken significantly over the medium to long term as a result of large capital investments on its Ichthys LNG project. We have observed no negative developments in the Ichthys LNG project’s progress since the Final Investment Decision (FID) in January 2012.
In fact, INPEX has made good progress toward completing financing for the project. We have concluded that this is an appropriate time to fully incorporate into our ratings the financial deterioration we believe INPEX is highly likely to experience during construction of its Ichthys project. We anticipate that INPEX’s debts will rise to fund its heavy cash investments, which it budgets will total JPY3.5 trillion for the next five years through fiscal 2016.
As a result, in our base case, we expect the ratio of INPEX’s funds from operations (FFO) to debt to continue to significantly exceed 30% through fiscal 2013 (ending March 31, 2014), owing to its large cash surplus, but to fall below 30% in fiscal 2015 and 2016.
On the other hand, successful execution of the Ichthys project should enhance INPEX’s competitiveness through greater production, improved geographic diversity of profits and country risk, and an enhanced record of operations. However, it is too early for us to fully incorporate these potential benefits into our ratings. In our view, the likelihood that the government would extend extraordinary support to INPEX in the event it were to suffer financial stress is “high,” up from “moderately high.” In line with our revised assumptions, we have elevated our ratings on INPEX two notches from the SACP.
We base this view on our assessment of the company’s very important role for and strong link to the government, which owns about 19% of INPEX’s common shares plus a golden share, which is unique to INPEX. Our revision primarily reflects our opinion that the importance of INPEX’s role in Japan’s energy security has increased materially since the Fukushima nuclear disaster, which has produced a significant increase in Japan’s demand for LNG. We expect INPEX to play a key role in raising Japan’s self-sufficiency ratio for oil and natural gas.
Also, we believe the FID on the Ichthys project strengthens the government’s support for INPEX because of its potential to increase the oil and gas supplies the company can deliver to Japan. The stable outlook reflects our assumption that INPEX will not encounter material delays or cost overruns and its financial risk profile will not deteriorate further than we have factored into our assumptions.
In addition, according to our GRE criteria, we do not expect that lowering our long-term sovereign rating on Japan (AA-/Negative/A-1+) to ‘A+’ would have negative implications for our ratings on INPEX.
We may consider lowering the SACP and lowering our ratings if INPEX experiences material cost overruns or delays in its Ichthys LNG project, or generates weaker measures of credit quality than we expect. These measures would include the ratio of its FFO to debt falling below 30% in the next two years. On the other hand, we view an upgrade as remote in the next two years because the target date for starting production at the Ichthys project is by the end of 2016.