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Rating Action:

Moody's downgrades JAPEX to A2, outlook stable

07 May 2010

Tokyo, May 07, 2010 -- Moody's Investors Service has downgraded the issuer ratings of Japan Petroleum Exploration Co., Ltd. (JAPEX) to A2 from A1. The outlook is stable.

The rating action concludes the review for possible downgrade initiated on Dec. 15, 2009.

The downgrade reflects a change in the baseline credit assessment of JAPEX to 8 from 7 due to Moody's concerns over JAPEX's increasing level of business risk as it invests abroad in exploration and development projects -- including the Garraf oil field in southern Iraq -- to secure a stable supply of oil and natural gas. In conjunction with the expected increase in overseas reserves, Moody's has changed the dependence on the Japanese government to "medium" from "high". Support level remains unchanged at "medium".

Specifically, it seeks to increase its total reserves to 350 million bbl by FYE 3/2013 from 270 million barrels at FYE 3/2009.

However, in the case of Garraf, the impact of the development costs on JAPEXs' leverage is expected to be modest, despite the elevated geopolitical risks of the region.

Initial costs for the first two years -- or until production reaches the level at which it can start receiving renumeration fees -- are expected to total USD 600 MM--800MM, with JAPEX responsible for 40%.

Financial assistance from governmental institutions, e.g. the Japan Oil, Gas, and Metals National Corporation, are expected to help further reduce the financial burden of the project.

Nonetheless, Moody's concern lies in the fact that JAPEX's business risk profile has historically been shaped by its focus on domestic upstream operations rather than exploration and development abroad.

But, over the 5-year period from FYE 3/2009, it plans to invest about JPY 260 billion, increasing its exposure to riskier overseas developments and restraining cash flow over the medium term.

Against this backdrop and once it achieves its objective of reserves of 350 million bbls, its domestic reserves may to decline to 60% of all reserves from 80% currently.

The stable outlook reflects Moody's view that JAPEX's conservative financial policy, strong balance sheet, and solid domestic operations will provide an ample cushion for its to absorb possible increases in leverage as its finding and development costs (F&D) rise.

The rating could be considered for an upgrade if JAPEX significantly increases its overall scale, leading to substantially greater diversification, while maintaining its conservative balance sheet.

Negative rating action may emerge if major setbacks arise in its international operations, or if F&D costs rise materially from current levels, resulting in significantly higher leverage

The last rating action with respect to JAPEX was taken on December 15, 2009, when the company's A1 long-term ratings were placed under review for possible downgrade.

The principal rating methodology used in rating JAPEX was "Independent Exploration and Production (E&P) Industry" published in December 2008 and "The Application of Joint Default Analysis to Government Related Issuers" published in April 2005, which can be found on www.moodys.com in the Research & Ratings directory, in the Rating Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating JAPEX can also be found in the Rating Methodologies subdirectory.

Japan Petroleum Exploration Co., Ltd. is an upstream oil and gas company 34% owned by the Japanese government.

Tokyo
Jun Sakurabayashi
Analyst
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Shinsuke Tanimoto
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's downgrades JAPEX to A2, outlook stable
No Related Data.
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