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S&P: high oil price will aid upstream EMEA oil, gas

Friday, 17 February 2012 | 11:00
Upstream oil and gas companies could see free cash flow squeezed in 2012, as they plan to increase capital expenditures, according to a report published today by Standard & Poor's Ratings Services titled "High Oil Prices Should Sustain Upstream EMEA Oil And Gas Companies In 2012, But Capex Continues To Rise." Standard & Poor's base-case credit scenario for this year assumes that prices will remain elevated despite a slight decline. This should support the operating cash flow of upstream (that is, exploration and production) oil and gas companies based in Europe, the Middle East, and Africa, even if free cash flow remains modest due to increased capital spending. A slight decline in oil prices could result from a shift in market sentiment; a significant rise in non-OPEC crude oil production of 1 million barrels per day (forecast by the International Energy Agency for this year); in addition to Libya's 2% of global production coming largely back on stream. This could impinge on credit quality, in particular if oil prices fall below our assumed Brent oil price of $90 per barrel in 2012. "Costs and capital investment have continued to rise with prices, constraining cash flows," said Standard & Poor's credit analyst Simon Redmond. "Persistently high capex remains a material credit factor for the sector. The extent to which organic and inorganic investments are matched by operating cash flows and disposals will likely continue to be an important consideration for our ratings." In the downstream segment, we believe high prices and low operating margins will continue to squeeze refiners that buy and process crude oil. European refiners will continue to face structural challenges such as overcapacity, in spite of some margin improvements in recent weeks following the default of Petroplus Holdings AG (D/--/--). Furthermore, we anticipate continued attention and influence being exerted from governments on this high-profile sector in 2012, especially if Europe reenters recession.
Source: Standard & Poor's Ratings Services
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