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ANALYSIS

Low oil prices unlikely to dent project finance ratings

DUBAI, April 14, 2015

The current low price of crude oil and natural gas is unlikely to have a widespread impact on the credit quality of global project finance debt over the next year to 18 months, a report said.

However, if prices remain in the $50 per barrel range for a sustained period or fall further than we expect, the outlook may prove problematic for projects with refinancing risk, market exposure, or input prices, added Standard & Poor's Ratings Services in its new research.

“Nevertheless, as of March, 71 per cent of our 282 rated global project financings, including most of those for oil and gas projects, carried investment-grade ratings ('BBB-' or higher),” Standard & Poor’s said.

“We expect many of these projects will continue to benefit from long-term contractual agreements, break-even points that were designed with low oil and gas prices as a base, the presence of substantial available liquidity to the issuer, or varying degrees of sovereign support.”

 Low oil and gas prices also make transportation project financing more attractive, as lower fuel prices encourage more highway and air travel and, indirectly, more train travel through the effect on power prices.

Lastly, the effect of sustained low oil and gas prices on some power projects will vary depending on the complex interaction of regulation, contractual obligations, and fuel costs, the RatingsDirect report said.

“The largest share of our rated project finance issues, at 31 per cent, are power projects, with transportation-related projects comprising 21 per cent, oil and gas projects 9 per cent, and energy projects representing 2 per cent ,” the report said.

“The latter four sectors are the ones that have attracted heightened interest since oil and gas prices began their precipitous decline from about $108 per barrel in the summer of 2014 to between $50 and $60 per barrel over the past few weeks. The current price of crude could make some lenders more cautious in underwriting new, long-term projects until there is more visibility about the depth and length of the oil price slump.

“A longer-than-expected slump will also, in our opinion, cause issuers to be more discerning in the selection of projects they undertake, forcing them to decide between urgent projects and those that are desirable but which can be put on hold. It's also likely that some projects will increasingly seek to offset part of the volatility risk of oil and gas prices through the use of private-sector partners and increased credit enhancement from supranational lenders,” it added.

Standard & Poor's benchmark assumptions for 2015 are $55 per barrel for Brent and $50 per barrel for West Texas Intermediate, with prices for each rising by $10 per barrel in 2016 and by the same amount again in 2017. – TradeArabia News Service




Tags: Standard & Poor’s | oil price | project finance |

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