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Rating Action:

Moody's affirms JAPEX's Baa1 rating; outlook remains stable

 The document has been translated in other languages

03 Jun 2020

Tokyo, June 03, 2020 -- Moody's Japan K.K. affirmed Japan Petroleum Exploration Co., Ltd.'s (JAPEX) Baa1 issuer rating and its baseline credit assessment (BCA) of baa3.

The outlook remains stable.

RATINGS RATIONALE

"The affirmation of JAPEX's rating reflects its conservative financial policy, as evident by its restrained level of capital spending, which will help generate free cash flow and control its debt level," says Motoki Yanase, a Moody's Vice President and Senior Credit Officer.

Moody's expects JAPEX's profits will decline during fiscal year 2020 ending in March 2021, due to weaker oil prices. JAPEX expects a 30% fall in revenue to JPY223.6 billion for fiscal 2020 and JPY8.2 billion of operating losses, which stand in stark contrast to the JPY14.2 billion of operating profits and the 4.5% operating margin it generated a year ago [1]. The rating incorporates a gradual oil price recovery after 2020, which will help JAPEX restore its profitability.

The deterioration in JAPEX's profits and cash flow is mitigated by its restrained level of capital spending and debt reduction, which will help maintain a solid level of cash flow coverage for the company. JAPEX's investments peaked in fiscal 2016, largely on a liquefied natural gas (LNG) storage terminal (the Soma LNG terminal) and gas pipeline infrastructure in northern Japan.

JAPEX's natural gas pipelines provide essential energy infrastructure in northern Japan, and this utility-like business generates stable pipeline transport fees that mitigate its exposure to oil and LNG prices and the risks arising from the modest scale of its E&P operations. With the completion of the Soma LNG terminal, the company's business mix is transitioning toward more non-E&P activities, such as energy infrastructure and renewable energy. JAPEX plans to achieve the proportion of operating profit and income from equity-method subsidiary for non-E&P business to increase to 40% over the next 10 years.

The company in recent years has reduced its capital expenditure, allowing its total debt to decline by around 20% in March 2020 from peak levels in March 2017, based on the preliminary numbers for March 2020. Moody's expects JAPEX to control its investments, at least for the next two to three years, which will help the company keep its net debt position close to break even and improve its retained cash flow (RCF) to debt ratio above 50% over that time frame, based on Moody's price deck post COVID 19. It has also maintained low debt relative to its proven reserves in the $3 per barrel-of-oil-equivalent range, which helps to mitigate JAPEX's relative weakness against larger investment grade-rated E&P companies.

JAPEX's profitability in North America will remain low -- despite its operations returning to profit in fiscal 2019 -- because its limited pipeline capacity to export western Canadian crude oil to refining markets will continue to constrain the oil price.

Moody's notes that the Japanese government directly owns about 34% of JAPEX's shares. Moody's incorporates this government ownership in the analysis of the uplift provided to JAPEX's rating, based on its status as a government-related issuer.

JAPEX's Baa1 issuer rating incorporates its baseline credit assessment of baa3 and a two-notch uplift based on the company's high dependence on the government and the strong probability of extraordinary support from the Government of Japan (A1 stable) if needed, under Moody's joint-default analysis for government-related issuers (GRI).

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of JAPEX's rating in the near term is unlikely because of the company's small scale relative to peer E&P companies. That said, Moody's could upgrade the company if it significantly increases its production and reserves or if it successfully diversifies into other businesses and maintains RCF/debt above 50%. Positive rating pressure could also build if the government enhances its support for JAPEX, such as through legal guarantees.

On the other hand, Moody's could downgrade the rating if (1) JAPEX's cash-on-cash returns remain low, for example, its leveraged full-cycle ratio remains below 1.0x; (2) its leverage and cash flow metrics remain weak, such that its RCF/debt is below 25% on a sustained basis; or (3) its business risks increase from new investments. The rating could also be downgraded if the Japanese government's rating is downgraded or its rating outlook is changed to negative.

The following environmental, social and governance (ESG) factors are material to the rating outcome.

First, Moody's regards the coronavirus pandemic as a social risk, given its implications for public health and safety. The pandemic led to the oil price decline and directly impacted JAPEX's profit and cash flow, although the risk is mitigated by its moderate debt level.

Second, JAPEX, along with other exploration and production companies, is exposed to elevated environmental risks originating from tightening regulation of oil and gas operations and the emergence of new energy sources that could reduce demand for hydrocarbons. These risks are motivating JAPEX to gradually shift away from E&P business and increase the proportion of non-E&P business over the next ten years.

The methodologies used in these ratings were Independent Exploration and Production Industry (Japanese) published in November 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1096408, and Government-Related Issuers Methodology (Japanese) published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186222. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Tokyo, Japan, Japan Petroleum Exploration Co., Ltd. (JAPEX) is the second-largest oil and gas exploration and production (E&P) company in Japan, with revenue of over Yen200 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES / CITATIONS

[1] Company Financial Results Presentation, 14 May 2020

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Motoki Yanase
VP - Senior Credit Officer
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Mihoko Manabe
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

No Related Data.
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