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Investing.com -- Moody’s Ratings has revised the outlook for Japan Petroleum Exploration Co., Ltd. (JAPEX) to negative from stable, while maintaining the company’s Baa1 issuer rating and baa3 Baseline Credit Assessment (BCA).
The change in outlook to negative is due to JAPEX’s lack of progress in increasing its production and reserves when compared to its similarly rated global peers. Roman Schorr, a Vice President and Senior Analyst at Moody’s Ratings, cited the company’s unclear growth and diversification strategy as a factor that increases uncertainty and limits its ability to enhance weak cash-on-cash returns.
JAPEX’s reserves and production have not improved significantly after the company divested its Canadian oil and gas projects in fiscal year 2021. This lack of progress contrasts with the significant strides made by its global peers in strengthening their reserves and production, all while maintaining robust credit profiles.
The company, which is the second-largest oil and gas exploration and production (E&P) company in Japan, ranks as the smallest among its global E&P peers at the Baa level. JAPEX’s net proved reserves were only 141 million barrels of oil equivalent (boe) in the year ended March 2024 (fiscal 2023), down from 317 million boe in fiscal 2020. This decrease is due to the divestiture of its shale gas and oil sand projects in Canada.
JAPEX is aiming to derive 40% of its operating profit and income from its equity-method affiliates in fiscal 2026 and 50% from its non-E&P businesses, predominantly the infrastructure business, in fiscal 2030. However, cash flow contributions from pipeline infrastructure are modest, limiting diversification benefits.
Despite JAPEX’s strong balance sheet, with substantial debt repayment after the divestiture of its Canadian oil and gas projects and cash balances exceeding its debt, Moody’s Ratings does not believe this offsets the declining reserves or risks arising from the modest scale of its E&P operations.
The Japanese government, which owns about 38% of JAPEX’s shares, has been considered in Moody’s analysis of the uplift provided to the company’s rating, based on its status as a government-related issuer (GRI). JAPEX’s Baa1 issuer rating includes its BCA of baa3 and a two-notch uplift to reflect the company’s high dependence on, and the strong probability of extraordinary support from, the Government of Japan if needed.
The negative outlook reflects Moody’s expectation that JAPEX’s production and reserves will remain weak relative to peers in the Baa category over the next 12-18 months. An upgrade of JAPEX’s rating is unlikely over the next 12-18 months, but the outlook could return to stable if the company significantly increases its production and reserves and successfully diversifies into other businesses while maintaining a conservative financial profile.
Moody’s could downgrade the rating if JAPEX fails to increase its production and reserves significantly, if its leverage and cash flow metrics deteriorate, or if the government becomes less supportive of the company. A decline in Moody’s joint default analysis assessment, such as a weakening in the support factor because of lowered government support, could reduce the GRI uplift and therefore the issuer rating. Negative pressure on the rating could also develop if the outlook on Japan’s sovereign rating is changed to negative or the rating is downgraded.
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