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Rating Action:

MOODY'S DOWNGRADES RATINGS OF NIPPON OIL (SR. SEC. TO Baa1) AND TONENGENERAL SEKIYU (ISSUER RATING TO Baa1), AND CHANGES LONG-TERM DEBT RATING OUTLOOKS OF SHOWA SHELL TO STABLE (SR. SEC. Baa1)

11 Jul 2003
MOODY'S DOWNGRADES RATINGS OF NIPPON OIL (SR. SEC. TO Baa1) AND TONENGENERAL SEKIYU (ISSUER RATING TO Baa1), AND CHANGES LONG-TERM DEBT RATING OUTLOOKS OF SHOWA SHELL TO STABLE (SR. SEC. Baa1)

Tokyo, July 11, 2003 -- Moody's Investors Service has downgraded to Baa1 from A3 the senior unsecured debt of Nippon Oil Corporation (NOC) and its supported subsidiaries, Nippon Oil Finance (Netherlands) B.V. and Nippon Oil (USA) Limited. It has also downgraded to Baa1 from A3 the issuer rating of TonenGeneral Sekiyu K.K. (TGSK).

These rating actions conclude a review of NOC and TGSK started on March 18, 2003. Their rating outlooks are stable. At the same time, Moody's has affirmed the long-term Baa1 debt rating of Showa Shell Sekiyu K.K. (Showa Shell), but has changed its outlook to stable from negative.

While Moody's recognizes the recent improvements in NOC's operating performance and capital structure, the magnitude and pace of such improvements have been slower than expected. NOC's profitability and cash flow coverage measures remain lower than those of similarly rated peers. It is also Moody's view that it would be difficult for the company to significantly improve its operating performance in the intermediate term due to the volatility in margins for refined products.

Moody's action on TGSK reflects the weakening Japanese market share of the combined Exxon, Mobil and General brands. It further reflects our expectation that the significantly higher debt -- compared with several years ago -- exhibited by TGSK's capital structure in 2002 is unlikely to improve materially in the intermediate term, given the Japanese oil industry's difficult operating environment. The rating action also reflects the company's weakened capital structure, due to its recent share repurchases.

The change in the rating outlook of Showa Shell reflects Moody's view that the company's efforts to strengthen its operating position -- through reductions to its fixed-cost structures -- will contribute to improving its financial leverage in the intermediate term. The Baa1 rating, however, incorporates the company's continued low returns on assets and its inherent sensitivity to any changes in crude oil prices and exchange rates.

Japanese oil companies face increasing challenges that will pressure their overall credit quality. These challenges include deregulation, continuing low returns on assets, pricing pressure on gasoline and limited success in upstream activities.

The slowdown in the Japanese economy and stiff price competition in the gasoline market have highlighted the structural weaknesses of Japan's oil companies. It is Moody's view that their business environment will remain challenging, preventing them from significantly improving earnings and cash flow.

NOC is better positioned than other Japanese oil companies in the area of gas/crude oil production, but still has only low oil and gas reserves. Therefore, the company is primarily a refiner and marketer. Consequently, its earnings and cash flow are very sensitive to moves in crude oil prices and exchange rates.

At the same time, the stable outlook reflects NOC's leading role in Japan's oil industry and Moody's expectation that it will remain a major, long-term player in the Japanese oil industry. NOC's solid market position should allow it to generate acceptable returns and cash flow for the maintenance of its Baa1 rating.

In the last 2 years, TGSK has implemented 2 major share repurchase programs, requiring about JPY100 billion in cash, significantly above its internal cash flow generation abilities. As a result, the company has become more leveraged than ever.

But despite the heavy dividend payout and share buyback burdens, TGSK has maintained a strong balance sheet structure, comparable with similarly rated Japanese peers. It is Moody's expectation that TGSK's capital structure will stabilize going forward. At the same time, we do not expect the company to reduce debt significantly -- in the light of the Japanese oil industry's difficult operating environment -- and that it will face continuing low returns on assets and pricing pressure on gasoline.

Its stable rating outlook is based on Moody's belief that TGSK will remain a major long-term player with a competitive market position in the Japanese oil industry. It should also remain a core investment in Japan for Exxon Mobil. As a result, TGSK is likely to benefit from support from its parent company.

So far, Showa Shell has: 1) adopted various cost-cutting measures aimed at lowering its break-even point for sales, 2) curbed its capital expenditure programs, and 3) executed asset sales over the past few years. Moody's believes that its ongoing efforts to implement a series of far deeper cuts may also help improve margins in what is a highly competitive environment.

Moody's believes that Japan remains a key market for the Royal Dutch/Shell Group of companies through its 50% investment in Showa Shell. Showa Shell, in turn, benefits from this affiliation in terms of product tie-ups, name recognition and brand image.

Nippon Oil Corporation, headquartered in Tokyo, is Japan's largest oil company.

TonenGeneral Sekiyu K.K. headquartered in Tokyo, is a leading oil refiner and distributor in Japan. Exxon Mobil Corporation, headquartered in Dallas, Texas, is rated Aaa for its senior unsecured debt.

Showa Shell Sekiyu K.K., headquartered in Tokyo, is a leading oil refiner and distributor in Japan. The Royal Dutch/Shell Group of companies, with dual headquarters in London and Hague, is rated Aaa through Shell Finance (Netherlands) B.V. and Shell Finance (UK) PLC - wholly-owned subsidiaries jointly and severally guaranteed by their group-level holding companies.

Tokyo
Junichi Yamaki
Senior Vice President
Rating Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Takahiro Morita
Managing Director
Rating Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

No Related Data.
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