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December 2003
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Thomas S. Coleman
John Diaz
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Alexandra Parker
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Kenneth Austin
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Jeremy Hawes
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Terry Fanous
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Summary
Moodys approach to rating petroleum companies starts from much the same point as other industrial companies. We
analyze historical cash flow protection, financial performance, and operating trends to place a company in the context
of its peer group and broader industry conditions. Historical markers, however, are just the starting point: the primary
function of credit ratings is to provide an opinion on levels of future cash flow and asset protection and, consequently,
the risk of default to debt holders.
The petroleum business, however, is not like a manufacturing operation, which can typically produce a new and
improved line of products every year as long as it has access to labor and materials. An oil and gas companys reserve
base is finite and depletes with every barrel produced. To be successful, a petroleum company must reinvest substantial
capital year after year to find new reserves and replace production. Exploration success and reserve replacement have a
large element of geological risk but are also linked to companies locations, core legacy positions, and technological
advantages.
While financial results and ratios are important to credit rankings, an oil and gas companys record and future
prospects are not effectively or most directly captured in its income statement, cash flow, and balance sheet. To arrive
at a more meaningful assessment of cash flow, asset protection and financial leverage, we look at a variety of petroleum
reserve measures provided in supplemental disclosures and how they intersect with the financial statements. Each of
these measures has a specific purpose (as well as analytical limitations).
In addition, the petroleum industry is a commodity business. Producers cannot control pricing, and competitive
conditions prevent them from passing on cost increases to consumers. Thus, we also focus on cost structure and operating efficiency, elements within a companys control, as critical indicators of its ability to operate and service debt in
difficult pricing and margin environments.
Finally, because of commodity price risk and high capital reinvestment risk, petroleum companies cannot bear the
elevated financial leverage typical of a more stable cash generator such as a regulated utility. The higher the financial
leverage, the lower rated a company is likely to be. For the same reason, larger integrated companies with more diversified cash flow and often countercyclical upstream and downstream operations are the highest rated companies in the
petroleum universe, while exploration and production companies, which lack the level of reserve diversification and
downstream integration, are more exposed to price risk and reserve success and are rated lower.
Table of Contents
Introduction ......................................................................................................................................................................3
Rating Process ...................................................................................................................................................................3
Petroleum Industry Structure And Fundamental Risks .................................................................................................4
Industry Structure ..................................................................................................................................................4
Industry Fundamentals ..........................................................................................................................................5
Moodys Approach To Commodity Price Risk ....................................................................................................6
Sovereign And Regulatory Risks ...........................................................................................................................6
Upstream Operations And Petroleum Reserves .............................................................................................................7
Reserve Analysis Some Qualitative Issues .........................................................................................................7
Asset Protection And Reserve Leverage Key Metrics ......................................................................................8
Operating Success And Cost Structure ............................................................................................................. 10
Refining And Marketing Analysis ................................................................................................................................. 12
Key Qualitative Issues ........................................................................................................................................ 12
Quantitative Measures ........................................................................................................................................ 14
Financial AnalysisKey Measures and Ratios ............................................................................................................. 15
Cash Flow Protection ......................................................................................................................................... 15
Capital Spending Analysis .................................................................................................................................. 16
Financial Returns And Quality Of Earnings ..................................................................................................... 16
Financial Leverage And Balance Sheet Analysis ............................................................................................... 18
Legal Structure And Covenants ......................................................................................................................... 19
Financial Flexibility And Liquidity .................................................................................................................... 19
Quality Of Management ............................................................................................................................................... 19
Event Risk ...................................................................................................................................................................... 20
Conclusion ..................................................................................................................................................................... 20
Other Related Research: ............................................................................................................................................... 20
Evaluating Managementa Brief Checklist ................................................................................................................ 21
Selected Petroleum Industry Terminology .................................................................................................................. 22
Sample Integrated Oil Credit Statistics....................................................................................................................24-29
Sample Independent Exploration and Production Credit StatisticsEOG Resources, Inc. .......................................30
Sample Independent R&M Credit Statistics ................................................................................................................ 31
Introduction
RATING PROCESS
Moodys credit rating process for petroleum companies follows a systematic approach similar to other industrial company analysis: we take a top down and bottom-up approach, starting with the macro-economic picture (broad political, economic, and industry environment), moving to an assessment of the companys operating and competitive
position, and ending with its financial position and strategy. A companys financial statements, footnotes, and ratios are
important to the process, supplying information to measure its health and ability to grow and providing a basis for
comparison with its peers. However, they are only part of the picture. Numbers as presented can be manipulated and
subject to different accounting treatments. Therefore, we look for ways to adjust financial statements and ratios to
reflect a companys true underlying risks and what we believe to be its true economic worth. Analysis of the petroleum
industry also involves a set of specialized petroleum reserve and production measures intended to capture information
not adequately reflected in an oil companys nominal financial statements.
Furthermore, while our long-term ratings capture historical debt protection measures and operating trends, our
focus is on forward financial protection and operating and cost trends, in essence trying to evaluate future operating
trends, cash flow, earnings and balance sheets. Key determinants of a rating are the volatility of a companys cash flow
and underlying debt coverages relative to the risks undertaken and to the companys peer group.
Rating
Qualitative Analysis
Management
Strategic Direction
Financial Flexibility
Quantitative Analysis
Financial Statements
Past Performance
Future Performance
Market Position
Competitive Trends in Sector Global/Domestic
Regulatory Environment Global/Domestic
Sectoral (Industry) Analysis
Sovereign Macroeconomic Analysis
Exploration
UPSTREAM
Production
DOWNSTREAM
Refining
Gas Processing
Chemicals
Transportation
Marketing
Coal
INDUSTRY STRUCTURE
The petroleum industry encompasses a number of segments, the most important of which are:
The upstream, which involves exploration, development and production of oil, natural gas and natural
gas liquids; and
the downstream, which relates to refining, transportation, and marketing of refined products.
Many companies also engage in mid-stream businesses such as natural gas gathering and processing of
gas liquids, energy marketing, and downstream petrochemicals. These will not be covered in this report.
For analytical purposes, petroleum companies can be broadly divided into three groups, each with distinct operating
characteristics and credit profiles:
The integrated majors engage in all phases of the business from petroleum exploration to refining and retail sales at
the gasoline pump. The majors by virtue of their large natural gas and capital resources are the prime movers in a
growing international liquefied natural gas (LNG) business on both the supply and receiving end. Many also have
extensive petrochemical operations. For them, petroleum is truly a global industry characterized by scale, geographic
diversification, and upstream and downstream counter-cyclical benefits that help stabilize cash flow. The integrateds
are thus the most stable and highly rated companies in the industry, with an average rating of Aa3.
Independent exploration and production (E&P) companies engage primarily in the exploration, development and
sale of crude oil and natural gas reserves, as well as gas processing in some cases. Their cash flow and earnings are more
volatile and exposed to commodity price swings, even as they must re-invest substantial amounts to replace depleting
reserves. Their reserve replacement and financial position can be more quickly impaired by commodity price declines,
exploration or production setbacks, or other unforeseen events. Over time, the relative performance and credit quality
of the E&P companies are determined by operating returns on invested capital, the money spent acquiring, finding,
and developing acreage and reserves, and the leveraging of reserves. Almost all of the independent E&P companies are
rated lower in the Baa or speculative grade categories, reflecting commodity price and reserve replacement risk.
Independent refiner/marketers manufacture and sell refined products, purchasing their feedstocks from producers
on the open market. The retail part of the business includes service stations networks and, increasingly, convenience
stores and fast food outlets. Refining and marketing are capital intensive, high volume and revenue businesses. They
are subject to thin margins and volatile price swings on crude inventories. Competitive pressures rarely support rich
pricing at the pump for very long. The performance of small niche refiners can also be dominated by geographical or
logistical economics that magnify the effect (positive or negative) of larger refining industry trends. Volatile earnings,
periodic cycles of non-discretionary environmental spending, and elevated financial leverage translate into low Baa and
speculative grade ratings for most of the refiner/marketers.
4
0
Aaa
1
Aa1
2
Aa2
3
Aa3
4
A1
5
A2
6
A1
7
Baa1
8
Baa2
9
Baa3
10
B1
$30
$25
$20
$15
$10
$5
$0
1991
1992
1993
1994
1995
Refiners
1996
1997
1998
Integrated Majors
1999
2000
2001
Oil Service
2002
Average Rating
2003
E&P
INDUSTRY FUNDAMENTALS
In assessing the credit risks facing petroleum companies, it is useful to remember a few key points about the industry:
Barriers to entry: The ability to establish a viable presence in the international petroleum industry is difficult
due to high barriers to entry in the form of capital, technological and drilling expertise, and required international skills. All of the major integrated players are long-established companies, as are many of the largest
independents, which have grown organically and through mergers and acquisitions. In an industry characterized by mergers and consolidations over the last two decades, the only significant new entrants have been
national oil companies, who in many cases have formed their own E&P units or can parlay their countrys
resources into joint ventures with experienced explorers and developers. National oil companies have become
savvy participants as well as head-to-head competitors with the major private sector companies in both the
upstream and downstream.
Commodity Price Risk: Crude oil and refined products are commodities priced and traded in U.S. dollars
on a global basis. Producers and refiners are price takers due to conditions of ample supply, lack of OPEC
discipline, the emergence of large non-OPEC supplies, and industry competition. Consequently, economies
of scale and cost competitiveness are critical to profitability. Natural gas, in contrast, is more regional in its
production and sales patterns (except in liquefied form) since market penetration is limited by pipeline access
and physical proximity. Natural gas prices are only somewhat de-linked from oil prices since they compete
with fuel oil in certain North American industrial and power markets, and in international markets such and
Europe and Asia sales contracts are usually linked to crude price baskets.
Depleting Resource Base: Oil and natural gas are depleting assets. A company must spend consistently and
successfully over a long-period of time to replace and grow its production base. Otherwise, its reserves and
market value will dwindle and the company will eventually liquidate. Many of the majors and most of the
investment grade E&Ps have core production concentrated in mature older basins in North America and the
North Sea, and the challenge is to grow production, while maintaining a competitive cost structure. Furthermore, while technological advances have improved recovery rates, they have also increased depletion rates
and exacerbated the reserve replacement and unit cost challenge. The challenge is likely to become more difficult in the future, particularly for companies concentrated in these mature areas.
Cyclicality: The petroleum industry is inherently cyclical, following global and regional patterns of economic
growth and product demand and industry patterns of investment, surplus and shortage. We aim, as much as
possible, to rate companies through the cycle, which means that at any given point in time a companys rating could look too high or low or might not correlate closely with its financial measures.
Asset Valuation: Historical financial statement accounting is limited in its ability to reflect true reserve and
equity values, due to fluctuating commodity prices, reserve performance, cost escalation, and the inherent
uncertainty in measuring reserves in the ground. Reserve quantification and valuation are part art and part
science, and the value of reserves in the ground is subject to changing prices, technology, and skillful exploitation. To get a better picture of a petroleum companys asset values and financial leverage, we look at cash flow
protection, but also at a variety of reserve and production based measures that focus on operating success, cost
efficiency, leveraging of reserves, and net present value.
Regulation/Environmental Risk: Government regulation is prevalent in most parts of the industry, tending
to fall most heavily in the area of environmental issues. This is particularly true in the downstream sector,
which is subject to legislation on clean products (low sulfur gasoline and diesel), MTBE phase out, air and
water emissions, site remediation and regulation of product prices at the pump. In addition, government regulation in certain countries such as South Korea and China favors the domestic refining and marketing industry. This reflects the strategic importance of oil to national economies and can be a supportive factor in the
ratings for these companies, with ratings that tend to be closely linked to the sovereign rating. In the
upstream, many producers are environmentally constrained in key growth areas such as the deepwater Gulf of
Mexico and the Rockies, and will also have to begin funding remediation and plugging and abandonment
activities as mature North American and North Sea fields reach the end of their economic lives. These expenditures are mandatory if a company is to stay in business and they typically provide little or no capital return.
We analyze environmental exposures on a case by case basis, including the share of capital spending allocated
to environmental projects, annual cash environmental costs, and the adequacy of the financial reserves established on an ongoing basis or for specific large liabilities. We also examine whether environmental outlays and
related legal judgments could become reimbursable under company insurance coverages.
dent reserve engineers varies significantly and can become a critical issue, particularly in evaluating independent E&P
companies. The challenge is compounded in analyzing reserves for some companies in emerging markets such as the
former Soviet Union, where the only reserve evaluations may be internally generated and not in compliance with SEC
or other international standards. Moodys believes the use of reputable independent reserve engineers can lead to more
conservative reserve bookings, but it does not eliminate reserve risk.
Location and Quality Differentials: In addition to the impact of commodity prices, the value of oil and gas reserves
is affected by geographic location and quality (certain physical properties result in higher/lower realized prices).
Reserve location has a major impact on costs, on establishing markets for production, and on political risk. While oil
production is a global business and is readily traded by ship, natural gas opportunities are more tied to existing pipeline
infrastructure and localized demand. Prolific, high quality oil or gas reserves will have higher finding and development
and transportation costs, and exact a high risk premium if they are remote and limited by infrastructure or political
considerations.
The physical characteristics of petroleum reserves will affect finding and operating costs, revenue realizations, and
upstream profits. A first look would involve the mix of oil and natural gas in the reserve and production base since pricing for the two commodities is driven by different factors. Physical properties refer to characteristics such as highvalue light sweet crude vs. lower-value heavy sour crudes, metals content, dry vs. wet natural gas, and numerous other
factors. These determine a companys price realizations, which can deviate significantly from spot market indicators
such as West Texas Intermediate, Brent, or Henry Hub gas. Price realizations are also affected by contract sales terms,
transportation/delivery differentials, and hedging practices.
Company Expertise: Companies often develop specific competitive advantages or areas of expertise, e.g. a long operating history in a country or basin, technology such as horizontal drilling, or a type of play such as heavy oil. Related
indicators include a companys large ownership or production sharing interest and status as a field operator, which give
it greater control over its capital spending and cash flows.
Integration: For integrated companies, equity access to specific crude slates and linkages between upstream equity
reserves and downstream refining and chemical configurations can have a significant impact on profitability and operating strategies.
PD basis. Most of the integrated majors have total RLIs on proved reserves in the 12-13 year range, in many
cases bolstered by long gas reserve lives. The independents have shorter RLIs with total RLI in the area of 10
years, but significantly shorter PD reserve lives in the 6-8 year range. A longer proved developed reserve life
generally affords the producer more capital investment flexibility and should indicate better production support for debt service. In effect, it means the reserve replacement treadmill is less onerous and that a company has more flexibility to reduce capital investment and ride out a period of low prices without seriously
impairing its asset base. RLI does not address reserve quality and it needs to be analyzed along with other
reserve characteristics. For example, a long RLI can indicate an increasing percentage of PUDs, which effectively lengthens the reported total RLI, since total current production is measured against undeveloped
reserves that are not producing. Other implications of a long RLI could be the reflection of long-lived high
cost reserves with a low net present value (NPV), or in the case of some of the national oil companies such as
Petroleos de Venezuela or the newly privatized Russian companies, long-lived resources whose low production levels indicate the need for significant development spending, infrastructure, or commercial market
developments.
When Moodys assesses a companys RLI, we focus on the absolute level of the PD reserve life and the RLI
trend, particularly for the independent E&Ps. This measure considers only those reserves that are already
developed (and usually producing) and thus provides a clearer indication of how long current production can
be expected to last. Also, the PD reserve life eliminates the impact rising PUDs may have on the reported
total RLI. We will also typically adjust RLI for acquisitions and significant new production volumes. To do
this we will consider a companys exit rate of production during a given period. The assumption is that the
company can produce at that exit level in future periods, giving a better indication of the true reserve life. We
also factor in the volumetric half-life of wellbores coming online and the characteristics of the various basins
in which a company operates to quantify the PD reserve life in a particular area. This analysis seeks to identify
pockets of short-lived or high decline rate production, as well as their impact on the companys ability to defer
capital spending during periods of weak commodity prices. It should be evident that this analysis becomes
more critical for smaller E&Ps or companies with highly concentrated basin risk.
Production Profile: An assessment of a companys current and projected production growth and where it
will come from are essential to judging credit risk. Larger and more mature companies have a base load of stable cash generating fields to underpin their drilling programs and usually can project production out three to
five years from current development and identified discoveries. These profiles are usually publicly disclosed,
albeit in varying detail. However, many variables and assumptions are involved, and the farther out a projection extends, the less certain the ultimate outcome. The depletion profile of a producing property should be
well understood to assess cash flow coverage, reserve life and reinvestment risk. For example, a company
could have short-lived reservoir with a high decline rate (as is the case in the Gulf of Mexico), a longer-lived
field with several years of plateau production and a long tail, or mature long-lived production from a heavy oil
field with a lower present value.
SEC Net Present Value of Reserves (NPV): NPV provides an alternative valuation of a companys equity
and future cash flow to traditional balance sheet analysis. NPV analysis discounts all of a companys projected
future cash flow from proved reserves to derive a single present value in dollars, after deducting the various
future expenses related to oil and gas development and production. The measure has certain limitations: it is
basically limited to SEC reporting companies and calculation methodology can vary significantly from company to company. Moreover, NPV is calculated at year-end based on then prevailing oil and gas prices, using
a fixed 10% discount rate and assuming no escalation in pricing over the life of the reserves. It can thus fluctuate significantly from year to year, based not only on changes in reserve volumes, but also due to year-end
price fluctuations or small changes in other assumptions. Still, NPV is valuable for company-specific analysis
and peer group comparisons. Various NPV ratios can shed light on future cash flow per barrel (NPV/BOE),
reserve support for debt service (NPV/Total Debt), and the integrity of balance sheet asset and equity values
(NPV/Capitalized Costs). The latter constitutes a quasi ceiling test on the capitalized value of a companys
petroleum reserves.
Total Debt/BOE Reserves: This leverage ratio measures the amount of financial leverage carried on each
barrel of proved or PD reserves and is based on the idea that petroleum reserves are a companys most important (or only) leverageable asset class. For oil companies, this measure is preferable to traditional debt/capitalization ratios, which are limited and highly variable in their accuracy and comparability due to accounting
methods (Successful Efforts vs. Full Cost), the variance between book and current market values for reserves,
and other factors such as large goodwill balances. We also use the Debt/PD BOE reserves measure as a more
stringent measure of leverage and reserve protection. Undeveloped reserves require capital to achieve production and therefore are not leverageable or available for debt service. For the integrated oils, Debt/BOE is in
Moodys Rating Methodology
the range of $1-$2 per BOE, with no debt allocated to other sectors than the upstream. For solid investment
grade E&P companies, the ratio tends to be in the high $2.00 to high $3.00 per BOE range. It should be
emphasized that we do not consider this metric in isolation. It may fluctuate depending on acquisition activity,
capital spending needs relative to operating cashflow levels, and commodity prices, but it usually falls within
those ranges for the highest rated companies in the peer group.
We note here, and discuss later, that we make numerous adjustments to the debt balance (numerator) to
include off-balance-sheet and other debt-like obligations. A limitation of this measure that should be noted is
that for the integrated oil companies, or for independent E&Ps with other significant operations such as midstream or chemical assets, these reserve measures do not give credit to the cash generating and leveraging
attributes of those businesses. For the integrateds, it is difficult to allocate a portion of the companys debt to
their large downstream and numerous other diversified operations and we tend to focus more on TD/BOE.
On the other hand, for the independents we do often make internal adjustments or allocations of debt to nonE&P operations in making peer group comparisons. Typically we would use a cash flow multiple to determine
the amount of leverage the non-E&P operations can support and discuss the impact of that allocation on our
view of financial leverage with a companys management. These allocations are subject to change and interpretation, however, and we do not currently disclose those adjustments in our peer group calculations.
Cash Flow/BOE: This measures a companys cash generation per BOE of current year production, based on
SEC 10 results of oil and gas producing activities rather than the consolidated cash flow statement. The cash
flow (net income + DD&A) is on an unleveraged basis, calculated after tax, but before corporate interest
expense.
10
Drilling Success Ratio: Drilling success measures the number of successful wells (finding hydrocarbons)
drilled in a year as a percentage of total wells drilled. This ratio serves as an indicator of the companys current
success and can be applied to exploration or development drilling success. However, it can be misleading.
Exploration success signals hydrocarbon discoveries but does not necessarily mean a well will have reserve
quantities or flow at rates sufficient to be commercially viable. More qualitative information is usually necessary to make an informed judgment about drilling success
Finding & Development Costs (Replacement Costs) per BOE: This is a unit measure of the total cost
incurred to add and develop a barrel of new reserves to the point of production. The lower a companys F&D
costs, the more profitable its oil and gas activities will be in a wider range of price environments. F&D costs
are subject to numerous variables, including the complexity and size of the reservoir, reserve booking practices, and timing issues such as development approvals. F&D costs are best measured over a period of years to
catch the inherent lag between capital spending and booking of reserves, and to reduce distortions caused by
one-time events. We look at F&D costs from all sources (acquisitions + exploration + development) and from
drilling only to better judge a companys drilling success (rather than from acquisitions). Industry wide, F&D
costs have been rising fairly steadily since the late 1990s, reflecting reduced exploration, lower drill bit
replacement, rising service sector costs and more remote higher risk drilling areas. The largest majors have
managed on an all-in basis to maintain fairly competitive F&D costs above $5/BOE on a volume weighted
average basis, while most of the large E&Ps are somewhat higher in the $6.50-$7.00/BOE range, again showing a rising trend on a multi-year basis.
Production (Lifting) Costs per BOE: This measures the total current cash operating cost of bringing a
barrel of oil to the surface. Production costs generally include operating, gathering and processing, well maintenance, facility and equipment costs, direct administrative expenses and production taxes. They can vary
greatly depending on the type of reserves being produced and the efficiency of a companys operations. Production costs are particularly important in assessing a companys cash realizations and ability to produce profitably in a given price environment.
Full Cycle Costs per BOE: Total full-cycle analysis considers all the cash costs required to produce and sell
a companys reserves as well as the costs (albeit historical) of finding and developing new reserves to replace
those produced. It puts the total cash costs of finding, developing and producing reserves on a comparable
unit cost basis and can be viewed as a reasonable proxy for a break-even price analysis. In general, lower total
full-cycle costs are viewed as a credit positive because they usually result in higher profits and cash flow and
provide a company with greater flexibility during periods of weak commodity prices. The full cycle cost per
BOE sums the 3-year average F&D costs (all sources) per BOE with total cash costs per BOE. These cash
costs include production or lifting costs, cash G&A costs (i.e. adjusted for any capitalized amounts), gross
interest expense and preferred dividends. We evaluate total cash costs on an unleveraged basis before interest
and preferred dividends, which excludes the impact of capital structure, and on a leveraged basis after interest
and preferred dividends. Whenever possible, reported company numbers are adjusted to eliminate differences
that may arise due to different accounting methods or classifications of certain costs to make analysis comparable across the peer group. This analysis does not factor in the impact of differences in price realizations,
which can often cause cash margins (revenues less cash costs) to vary materially from one company to another.
However, that is captured in our recycle ratio analysis.
Recycle Ratio: The recycle ratio incorporates revenues and cost structure to show on a unit basis how much
cash a company generates in excess of its costs of replacing reserves, which would be available for further
investment in growth. It is calculated by dividing a companys cash margin per BOE (production revenues less
cash costs including interest expense) in a given year by its 3-year average F&D costs (all sources), to give
effect to a full investment cycle. In evaluating cost structures, the ratio reflects the differences in price realizations among companies, which can be substantial. As noted earlier, the price a company receives for its oil and
gas production often varies depending on location, specific product characteristics, and hedging. Production
can either be sold at the well-head (i.e. before incurring transportation costs) or at certain hubs (i.e. Henry
Hub or AECO). Geographic location may also impact realized prices, as international production is often
subject to some type of PSC/PSA or other pricing mechanism. While this ratio factors in differences in price
realizations, it is also clearly affected by commodity price levels. Therefore, this ratio can be quite meaningful
when analyzed through commodity price cycles. In general, a recycle ratio that remains above 1.0x during
periods of weak commodity prices is viewed positively. We have attached a sample chart (using EOG
Resources) that provides an overview of the reserve and production statistics, operating and cash flow numbers, and full cycle cost structure analysis for our analysis of independent E&P companies.
11
Refinery Schematic
Feed Stock
Fractionation
Products
Upgrading/Processing
Fuel Gas
Lighter
Liquified
Petroleum Gas
Chemical
Feedstocks
Light
Gasoline
Naphtha
Blending
Reformer
Kerosene
Heated
Crude
Oil
Jet Fuel
Diesel Fuel
Heating Oil
Diesel
Light Gas
Oil
Heavy Gas
Oil
Residuum
Motor Gasoline
Hydro
Cracker
Fluid
Catalytic
Cracker
Alkylation
Plant
Aviation
Gasoline
Petroleum
Coke
Coker
Asphalt
Fuel Oils
Distillation
Column
Lube Oil
Hydro
Cracker
Lubrication
Oils
Heavier
folio benefit for refiner credit ratings. Exposure to seasonality, different margin characteristics, unplanned
refinery outages, and other factors varies from market to market and across national boundaries.
Refinery Size: Size per se is not a virtue or a guarantee of acceptable returns in an over-capitalized industry.
However, refining is a volume driven business with a large fixed-cost component. A larger 200,000 bpd refinery can benefit from economies of scale to lower unit costs and is more likely to be the efficient survivor than
a 50,000 bpd unit, particularly under the burden of non-productive environmental costs. The most-used measure of refining capacity is barrels per day of crude distillation capacity, which measures first stage treatment
of crude inputs. A refinery may have numerous other upgrading units that run distilled crude fractions and are
more relevant to determining its product slate and profitability.
Refinery Configuration and Complexity: A refinerys crude diet will depend on its configuration and
complexity, or the number of different operations it performs to yield higher value products. (See Refinery
Schematic Chart.) A simple crude distillation refinery generally needs more expensive light crudes (30-34
degree API gravity) to produce an acceptable light product yield of about 70% gasoline, diesel and jet fuel.
The more complex processes such as hydrocracking, coking, reforming, and alkylation transform or upgrade
the carbon molecule. These processes enable a refinery to run lower-cost heavy sour crudes and still produce
a high value product slate, minimizing low value ends (residual). Complex refineries are also more expensive
to build and have higher capital costs to recover. Medium and highly complex refineries (deep conversion
refineries) typically produce 70-85% gasoline and jet fuel.
Refinery Reliability: Plant reliability has a very major impact on refining costs and profitability, and industry
accidents and downtime tend to increase during periods of high utilization and cost cutting. Reliability is a
function of equipment age, complexity, company maintenance and safety policies, and ongoing capital investment. Indicators of reliability and operating expertise include utilization rates at the plant level, the frequency
of unscheduled turnarounds and major or minor mishaps, and managements track record on restoring operations after interruptions and accidents.
Crude Slate: Crude feedstocks accounting for more than 80% of a refiners barrel of product cost. A refinerys optimal crude slate is largely determined by its complexity and location. In assessing a refinerys cost
structure and competitive position, we look at its typical crude diet, light or heavy (gravity), sweet or sour (sulfur content) and the availability of supplies. A consistent and predictable crude slate enhances operating efficiency and product reliability. A flexible refining configuration and balanced mix of lighter and heavier crudes
also allow a refiner to take advantage of changing price differentials between crudes. Many of the U.S. refiners
have invested in cracking and coking capacity based on a trend in heavier crude supplies and a longer term
expectation of widening light/heavy crude differentials. Light/heavy differentials change frequently based on
the relative supplies of crude on the market.
Inventory Management: Management of crude and product inventories has a direct effect on financial performance. A refiner that can minimize the time lag between crude pricing, delivery, processing and product
delivery can reduce working capital needs and exposure to inventory losses and adverse product price movements. This problem can be most acute in a declining crude price environment, when a refiner has purchased
crude and built inventories at higher prices and can experience from 20-40 days lag between crude purchase
and product delivery to the market.
Logistics and Location: Product supply and distribution channels have a major impact on refiners cost
structure, profitability and competitive advantages. Supply and distribution configurations are typically complex, comprising pipelines, ships/barges, trains, trucks, and crude and product storage terminals. The refiners
goal is to minimize transportation costs, ensure safety and dependability, and access the most attractive markets. Branded retail and branded wholesale markets typically offer higher margins than unbranded wholesale
and spot markets. Refinery location (land-locked, on a river, near ports) not only affects market access, but
also affects transportation costs, access to crude supplies, and energy costs. Proprietary pipelines or access to
third party capacity can be particularly important to refiners in regions with excess supplies seeking higherreturn markets. Certain geographic markets or niche players can also have differential margin advantages. For
example, in California refining margins tend to be higher due to strong year-round demand for gasoline,
unique fuel specifications to satisfy environmental regulations, and limited competition from pipelines and
product imports.
Downstream Integration: Refiners invest in service stations and linked convenience stores to capture maximum value-added. Retail operations can offset volatile wholesale product margins, since gasoline margins frequently (but not always) increase when wholesale margins are under pressure. Retail integration is particularly
beneficial in highly competitive and over-supplied markets (e.g. the U.S. Gulf Coast) since it helps place
products and maintain market share. Most major participants emphasize high volume, upgraded stations in
13
key locations. Convenience stores, likewise, attract customers and increase gasoline sales, but they also provide higher-margin revenue diversification. Convenience items carry a high margin, averaging 32-33 cents
per sales unit, versus typical 2 to 3 cent margins on a gallon of gasoline. For the same reasons, marketers are
also linking up with fast food chains such as McDonalds. Many refiners also produce feedstocks that are strategically linked to downstream petrochemical operations and contribute to utilization and stronger margins.
Retail Configuration: Different paths to branded retail marketing require varying degrees of company
involvement and capital commitment. Real estate is typically one of the highest cost components in gasoline
marketing and can tie up large amounts of capital. Thus, ownership and operation of a large number of stations do not necessarily lead to higher profitability. Company-controlled stations generally provide maximum
financial and operating control, but also entail higher SG&A and capital costs than other distribution channels. In fact, direct company-owned and operated service stations are less prevalent than more wholesale oriented company-owned/dealer operated stations and branded jobber networks, which provide brand outlets
but are much less capital and real estate intensive for the refiner/marketer.
QUANTITATIVE MEASURES
Standard reporting of refinery earnings and operating data make it possible to construct a reasonable picture of performance and output for most refiner/marketers, but a real understanding of unit costs, performance and profitability at
the plant level is often hard to derive from reported numbers and is subject to comparability problems. We look at a
number of different measures, some of the most important of which are published as the key credit statistics that
accompany our quarterly opinion pages on integrated oils and independent refiner/marketers.
Return and Coverage Measures: Segment pre-tax and net return on capital employed (ROCE) are the
measures most widely used by the companies themselves to assess performance and make comparisons with
their peer group. Among the key measures we look at are EBIT/Average Capitalization as a measure of return
on debt and equity, EBIT/Operating Margin to measure the competitiveness of cost structures in a highly
volatile margin sector, and standard fixed charge coverage ratios, which likewise reflect refining margin volatility. Operating segment return on assets is also an important measure but can be difficult to compare because
of the different age profiles of many of the asset bases in the sector. However, non-recurring items such as
write-downs and gains can affect reported capital returns and must be taken into consideration. R&M cyclicality, excess capacity and surplus supplies resulted in very poor capital returns in the past decade, in the range
of 4-6%, which prompted the widespread restructuring and joint-venture efforts that have taken place.
Financial Leverage: While Debt/Capitalization is often cited in financial leverage analysis, this measure for
refiner/marketers can be somewhat distorted due to the mature and depreciated refining assets in the portfolio, acquisition and divestment activities, and the impact of goodwill and merger accounting. We typically
focus more on Gross Cash Flow/Total Debt and Retained Cash Flow/Total Debt as measures of cash generating strength (see financial discussion below). We have also begun publishing a measure for the independent
refiner/marketers, Debt per Complexity Barrel of refining capacity. This asset leverage ratio measures a companys debt burden relative to its Nelson complexity barrels, an industry classification that compares asset
classes across different refiners, measuring the quality of the refineries and their future cash generating potential. In effect, it measures the amount of debt per barrel of equalized refining capacity. In theory a more
complex refinery will be able to bear more leverage based on the yield of more profitable higher value products it produces.
Refinery Utilization: Refinery utilization (barrels of crude input as a percentage of rated capacity) is generally viewed as a good indicator of operating efficiency since high utilization reduces unit costs and increases
product sales volumes. While this can be true for the individual refinery or company, high utilization has not
benefited the industry in aggregate or resulted in increased profits. In addition, utilization is usually measured
on primary distillation capacity (raw crude inputs), which will not necessarily enhance profits if, for example,
downstream units are out of commission and the refinery is producing a sub-optimal product stream (e.g. too
much middle distillate or residual in a gasoline market). Capacity creep (cheap incremental capacity added
during routine turnarounds or environmental projects) has increased sustainable processing capacity at many
refineries, resulting in under-reported nameplate capacity and extremely high industry utilization in the
range of 90-95%.
14
Crude Self-Sufficiency: For integrated companies, crude self-sufficiency measures the degree to which a
refiner can obtain crude from internal upstream sources, (upstream crude produced as a percentage of downstream crude volume requirements). A higher degree of self-sufficiency would generally indicate more value
added and enhanced profitability. While a high degree of crude self sufficiency can be viewed as a positive, it
has become less crucial in light of plentiful crude supplies, sophisticated trading capabilities and product swap
arrangements.
Refinery Margin per Barrel of Output: Companies often do not publicize unit refining margins and cash
operating costs because of competitive concerns. When they do, the methods used to calculate refining and
retail margins can vary, making comparisons difficult. However, when available, we compare gross margins
(product revenues less crude costs) per unit of product output among companies and against an appropriate
industry benchmark such as the 3-2-1 crack spread or the 4-2-1 heavy crack spread.
Product Slate: Product slate is the mix of a refinerys end products such as gasoline, jet fuel, middle distillates
(diesel) and heavy ends, usually broken down on a percentage basis. Generally, the higher a refinerys yield of
gasoline and light ends, which command a premium, the more profitable it should be. A highly complex refinery can produce 75-85% light products. However, margins are affected by industry inventory levels and
demand. Refinery configuration and product slate should ultimately be geared to the market served in order
to efficiently clear product and avoid disposing of excess supplies at a discount.
Retail Market Share: A companys share of product volumes and service stations can indicate market clout
and the ability to move product, but does not necessarily correlate with profitability. Market share can be
measured within a companys own market area or in the context of a larger (e.g. national) scale. A major
retailer such as Shell or BP can have a 20% share in selected local markets in the U.S. or national markets in
Europe or Asia, and will compete head on with large regional independents, hypermarkets, and other participants for major stakes in a national market.
Refined Product Integration: This ratio measures a refiners own product self sufficiency, or output as a
percentage of product sales (refined product output/total sales volumes). In theory, the more internal production, the higher the profitability, although trading capabilities and surplus inventories reduce this advantage.
Most larger refiner/marketers are net buyers of refined product to sell through their systems.
Throughput per Outlet: Gallonage sold per retail station is an important measure of efficiency. Generally,
higher volume stations in prime urban locations can sell upwards of 200,000 gallons per month and are more
desirable and profitable. Small rural markets sometimes can enjoy high margins, but typically throughput is
lighter and they bear high transportation and servicing costs. Industry restructuring has focused on eliminating small volume rural or urban stations that have high costs and low volumes.
15
Free Cash Flow/Total Debt: residual cash flow protection for debt service after funding of dividends and
maintenance capital.
GCF/Capex: a measure of a companys ability to fund its capital spending from internal cash flow.
RCF/Capex: internal funding of capital spending after dividends have been serviced.
DD&A/Capex: the level of reinvestment of amortized capital; over time, a company should be reinvesting
equal to or in excess of its DD&A.
The definition of maintenance capital spending can vary. It generally includes basic maintenance projects, environmental clean-up or prevention programs, and sometimes key capital investments necessary to maintain or improve
a companys competitive position. Since the industrys chief challenge is asset depletion, maintenance capital includes
core spending necessary to replace reserves. (In reality, stronger companies with deeper reserve bases can cut these
investments during periods of stress without permanent impairment.) In the petroleum industry, maintenance spending should also include future contractual spending commitments, which are prevalent via partnership arrangements
and long-term supply relationships. A useful, albeit simplistic, proxy for maintenance capital needed to replace 100%
of production is to multiply a companys F&D costs (e.g. three year average) by annualized BOE production. For
example, a company with F&D costs of $4.50/barrel and annual production of 100 million BOE would have to spend
$450 million per annum to maintain its reserve base ($4.50 X 100 MM BOE = $450 MM).
Larger integrated oil companies typically have a greater capacity than other industry participants to internally
fund capital spending. Fair amounts of non-core asset sales also routinely supplement operating cash flow for these
mature diversified companies. However, large dividend payouts are also the norm, often in excess of 50% of earnings,
and contributing to a need to finance. Large acquisitions, multi-year capital projects, and share repurchases also can
contribute to rising financial leverage.
Cash flow for independent E&P companies and refiner/marketers tends to be more volatile. E&P cash flows are
exposed to fluctuating commodity prices and large investments to replace reserves, and the impact of capital curtailments can be more severe for an independent than for an integrated major. The refining and marketing industry benefits from cyclical periods of free cash generation and can more readily curtail discretionary growth projects without
permanent impairment. Nevertheless, volatile margins and mandated capital can hurt earnings and absorb free cash
flow, as happened in the mid-1990s when the industry made major investments for clean fuels and other environmental mandates. We believe price risk and high capital requirements make high dividend payouts and share repurchase
programs unadvisable for independent E&P companies, and generally negative credit events both for debt protection
and for future growth.
16
operations are generating free cash to support reinvestment in other areas and which operations are consuming cash.
Segment operating returns can also point up vulnerability to restructuring and asset writedowns, as well as industry
pressure points and trends.
Return on capital employed (ROCE) is one of the industrys most widely used return benchmarks, both for operating divisions and the consolidated company. We also look at pre-tax return on capital as an indicator of operating
return on debt and equity. Other important return measures include operating and net return on sales (ROS), return
on assets (ROA), and return on equity (ROE). ROS and ROA are useful for high revenue, capital intensive portions of
the operations such as refining and marketing. Most of the majors view a 12-15% ROCE as an acceptable capital
return on a mid-cycle basis, recognizing that they can be higher or lower depending on the cycle. Despite rigorous
streamlining and cost reductions, this target has proved difficult to achieve on a sustainable basis due to depressed
upstream pricing and the capital tied up in downstream operations. The R&M sector typically has returned no more
than a 5%-6% return on capital compared to significantly higher upstream returns, which explains the industrys
ongoing efforts to joint-venture and rationalize their R&M operations.
Quality of earnings and comparability of peer group companies is also an issue due to accounting variations and
the impact of non-recurring events. We adjust for these items, as necessary, to get a truer picture of operating earnings,
net income, and fixed charge protection. Some of the more common factors that can affect reported returns in the
petroleum industry are:
Full Cost vs. Successful Efforts Accounting: These two accounting methods affect a companys reported
exploration expense and earnings and the capitalized value of its oil and gas operations, mainly due to differences in the treatment of dry holes, or the expenses related to unsuccessful wells. Under successful efforts,
only expenses related to successful commercial wells are capitalized, while dry holes are expensed against
earnings when incurred. The full cost method capitalizes dry holes and amortizes them against all future
production. In effect, it treats dry holes as part of the full cycle of costs needed to bring successful wells
onstream. Other costs incurred also are capitalized, including interest costs and certain components of SG&A
that would be expensed under Successful Efforts. Successful efforts can lead to more volatile earnings. Full
cost tends to overstate the balance sheet valuation of reserves and equity as reported earnings build up. The
two methods should be cash flow neutral over time, since a more steady earnings profile under full cost tends
to be offset by higher DD&A on the cash flow statement. From a credit perspective, successful efforts is more
conservative, or closer to economic reality, vis-a-vis earnings, asset capitalization, and book equity, since dry
wells are written off up front. All of the integrated petroleum companies and many of the larger independents
use successful efforts, although it should be noted that three of the largest E&Ps, Anadarko Petroleum,
Apache, and Devon Energy, use Full Cost. Proponents of full cost tend to be smaller E&P companies less able
to withstand volatile earnings gyrations.
Inventory Accounting: Last-in-First-out (LIFO) inventory accounting is used by virtually all the larger integrated and independent refining companies. In LIFO accounting, a company books its crude inventory purchases using the most recent crude price. During periods of crude price volatility, the time lag between
feedstock purchases and the sale of the refined products causes profits to be understated when crude costs rise,
and overstated when crude prices fall faster than product prices. Regardless of method, the cash costs of purchasing and carrying crude oil are the same. LIFO also means that inventory carrying values can be undervalued on the balance sheet (the LIFO Cushion), particularly for long-established companies that carry many
layers of cheap oil on their balance sheet. Costing through or drawing down these older low priced layers
can lead to inventory profits without any real impact on cash flow.
Tax Issues: Companies in different locales may be subject to different corporate tax rates and other taxes levied on the industry. Statutory tax rates may differ dramatically from cash taxes paid depending on spending
levels and tax deferrals, as well as differing foreign tax credit and tax loss carry forward positions.
Non-recurring Charges/Gains: The petroleum industry is prone to one-time charges or gains that can
mask a companys underlying operating performance. Major sources of such charges, which may or may not
have a cash impact, include reserve sales and ceiling test writedowns; the restructuring or sale of under-performing refining and chemical assets; personnel reductions and associated severance programs; and exits from
non-core businesses such as coal and metals. We look at the cash impact of the charges on reported earnings
and cash flow.
Impairment/Ceiling Test Writedowns: For companies following successful efforts accounting, FAS 144
prescribes procedures for assessing impairments in the value of long-lived assets. For the petroleum industry,
the rules primary impact is on reserves, which can be written down during periods of price volatility. The
impairment test is performed at the lowest identifiable asset unit, in this case typically at the oil field level. It
begins by comparing the estimated undiscounted future cash flows to the book value of the assets. If those
17
cash flows are less than book value, the assets are impaired. Alternatively, if the undiscounted future cash flows
exceed the book value of the asset, then no impairment is recognized, even if the fair value of the assets is less
than the book value. Once an asset (a field) is determined to be impaired, a charge is taken against income to
writedown the assets to their fair value, reducing reported earnings and book equity. For companies following
full cost accounting, the rules for assessing reserve impairment are included in SEC Regulation S-X, Rule 410. Each quarter, companies are required to estimate the discounted future cash flows for each full cost pool
(usually all reserves held in a particular country) using current period-end oil and gas prices and a 10% discount rate. This ceiling amount is compared to the book value of the full cost pool and if the ceiling is
lower, the full cost pool is written down to the ceiling amount, resulting in a charge to income.
These impairments contribute to reported earnings volatility but can serve as a valuable reality check on overvalued assets. Overtime they also can mask bad investment decisions (e.g. inflated acquisitions) and provide a quick fix for
poor capital returns. The writedowns can also be somewhat punitive on economic values. Once reserves are written
down, they cannot be written back up even if the price decline proves to be temporary and the reserves will be producing for many years. In general, these non-cash writedowns do not affect credit ratings, although they can be indicators
of potentially serious financial stress or can trigger liquidity problems, particularly for smaller capitalization companies
that have borrowing bases in their bank loan agreements.
18
Quality of Management
The quality of a companys management is one the most important and difficult to quantify factors in the credit rating process. Our assessment of managements abilities and risk appetite can often be the deciding factor in a rating.
Management controls all the internal elements central to a companys credit quality, including most importantly, the
companys risk appetite, controls, leverage targets, and philosophy on use of financial leverage and shareholder
rewards. Management must also react to and deal with the larger industry environment outside its control. We evaluate managements track record, its strategies for future growth and core operations, and its financial policies and control systems. The companys strategic direction should derive from managements views of the larger business
environment and where it sees the companys strengths and weaknesses. Implicit in this is managements appetite for
business/operating risk and financial risk. We have attached as an addendum a brief summary of the more important
issues we examine and questions we ask in evaluating management.
19
Event Risk
A final consideration is the possibility that a special event could cause a sudden and sharp decline in an issuers fundamental creditworthiness. Special events have an unavoidable element of surprise because their precise timing, nature,
and impact on a companys creditors cannot be predicted in advance by the tools of fundamental credit analysis. Typical special events are mergers and acquisitions, capital restructuring programs such as large share repurchases and, at
the extreme, leveraged buy-outs. For commodity-based industries, prolonged periods of price weakness often force
industry consolidation and increase the probability of event risk. Low upstream pricing and weak downstream returns
were the impetus for much of the merger activity in the late 1990s, which extended to the integrateds, refiner/marketers and independent E&Ps.
Event risk tends to affect a companys credit fundamentals most significantly when it involves a major change in
company management or a dramatic increase in debt leverage. Most recent mergers have not resulted in downgrades
largely because of the potential cost savings, enhanced asset bases and market position, and generally conservative
equity financing involved. Large debt-financed reserve acquisitions frequently result in downgrades since high fixed
charges and reduced financial flexibility are incompatible with volatile commodity prices and cash flows. Over the past
decade, environmental and other litigation and major industrial accidents have resulted in a few special events, creating
large unexpected claims and cash payments against an issuer. We examine these events on a case-by-case basis. When
litigation is involved, we try to determine possible outcomes, looking at the companys liquidity and financial reserves,
as well as its ability to sustain large cash outflows and maintain financial flexibility. To a certain extent, share repurchases can be viewed as a predictable event, in which case we try to look at the market forces motivating the repurchases and managements own appetite for shareholder rewards.
Conclusion
Moodys credit ratings for petroleum companies synthesize a companys financial and operating profile and our expectation for future performance and debt protection measures in light of specific company and industry risks. Our analysis starts with company cash flow and balance sheet analysis historical and projected and is expanded to include
significant underlying petroleum reserve and production valuations and trends derived outside the financial statements. The need to incorporate reserve analysis is based on the fact that depletion of the petroleum resource base
makes reliance on historical results misleading and possibly irrelevant. Petroleum exploration and production entail
significant geological and other risks, with large ongoing investment to offset depletion. In addition, a companys nominal balance sheet values do not reflect the underlying value of reserves in the ground, or their future cash flow and
profit potential since reserve values change constantly with market changes in commodity pricing.
Related Research:
Special Comment:
Oil & Gas Industry Update, November 2003, #80027
Leveraged Finance Industry Updates: Gas and Oil, June 2003, #78434
Goodwill Accounting in the Oil Patch, December 2002, #77044
Industry Outlook:
Integrated Oil Industry Study, October 2003, #79843
Rating Methodology
Moodys Approach to Assessing Key Credit Measures for Investment Grade E&P Companies, February 2003, #77114
Increased Environmental Compliance Spending, December 2002, #76889
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.
20
STRATEGIC DIRECTION
FINANCING PHILOSOPHY/CONSERVATISM
Managements tolerance for and philosophy towards the use of debt;
Financial leverage: Do they have leverage targets? Do they stick to them? When would management deviate, and if they do, will they restore it quickly?
Term structure of debt and suitability of liability structure to cash flow.
Mix of short-term and long-term debt; use of hybrid securities.
Liquidity management: cash balances, alternate liquidity.
Hedging practices: mitigation of interest rate, foreign exchange and commodity price risk. Compensation
practices for traders.
DIVIDEND POLICY
Approach to shareholder rewards, share repurchases?
Quality of earnings; accounting methods: conservative or liberal?
Capital allocation methodology: what projects receive financial support, required hurdle rates and exceptions to general practice.
Off-balance sheet financing (leases/project financing): Uses? Tax purposes, political risk mitigation, balance sheet dressing?
CONTROL SYSTEMS
Corporate governance: does the company have strong outside representation on the board?
Is there a succession plan in place?
What internal auditing and financial controls are in place?
Controls on hedging and use of derivatives?
21
22
Coking: Heat process to crack heavy asphalt/residuals into more valuable gasoline and jet fuel. Also produces petroleum coke, which is used as industrial fuel.
Reforming: Process uses chemical catalysts to improve (reform) octane content of gasoline.
Alkylation: Process builds smaller petroleum molecules into larger ones. Upgrades light end products into gasoline
octane components.
Product Yield: The various finished products manufactured in the refining process. Motor gasoline and jet fuel are
the highest value added products, while asphalt and fuel oil (bunker) are the heaviest and lowest value added products.
Crack Spread: The market price differential or margin between crude input costs and the yield of products manufactured. Used as industry indicators of profitability. Most common benchmark is the 3-2-1 crack spread, which indicates
the spread on three barrels of benchmark crude cracked into two barrels of gasoline and one barrel of distillate.
Light/Heavy Differential: The spread between prices for light crudes such as West Texas Sweet and heavier crudes
such as Mayan or Venezuelan Merey. A change in the spread indicates relative shifts in the value and cost of different
crudes, and the profitability of the refining processes and investments that depend on those crudes.
23
24
Moodys Rating Methodology
Company
*Exxon Mobil Corporation
Royal Dutch/Shell Group of Companies
*BP plc
*ChevronTexaco Corporation
*Total S.A.
*ENI S.p.A.
*ConocoPhillips
*Marathon Oil Corporation
*Repsol YPF S.A.
*Amerada Hess Corporation
Averages
Medians
Net Sales
178,909(2)
179,431(1)
178,721(3)
91,685(5)
110,459(4)
51,623(6)
50,512(7)
27,214(9)
38,301(8)
11,932(10)
91,879
71,654
Oper.Margin
8.4(5)
8.5(4)
4.8(8)
7.6(6)
9.9(2)
15.5(1)
4.6(9)
3.9(10)
5.9(7)
9.7(3)
7.9
8
ROS
6.4(2)
5.2(5)
3.8(6)
1.2(8)
5.8(3)
9.6(1)
-0.6(9)
1.9(7)
5.5(4)
-1.8(10)
3.7
4.5
Div.Payout
(%Income)
56(7)
76(5)
77(4)
264(1)
44(8)
66(6)
96(2)
89(3)
19(9)
-49(10)
74
71
Interest
Coverage
20.0(1)
11.3(5)
6.7(6)
11.4(4)
14.7(2)
12.1(3)
3.0(9)
3.7(7)
1.7(10)
3.4(8)
8.8
9
Total
ROC
Coverage (Pretax)
10.8(3) 17.2(4)
8.4(4) 22.0(1)
5.3(6) 12.3(6)
7.2(5)
8.5(8)
13.4(1) 20.2(3)
12.1(2) 20.6(2)
2.6(9)
6.4(9)
3.2(7)
9.6(7)
1.6(10) 16.7(5)
3.1(8) 2.0(10)
6.8
13.6
6.2
14.5
Adj.EBIT
%ADJ.
Avg.Cap.
14.8(5)
19.8(1)
10.6(6)
8.2(8)
19.5(2)
18.7(3)
4.1(9)
8.9(7)
15.8(4)
2.6(10)
12.3
12.7
RCF%TD
134(1)
52(5)
54(4)
36(8)
63(2)
59(3)
16(10)
33(9)
41(6)
39(7)
53
46
Total
Debt%
Cap.
10(1)
21(2)
21(3)
30(5)
28(4)
33(6)
34(7)
35(8)
40(9)
49(10)
30
32
% GCE
Employ
109(4)
40(8)
77(6)
68(7)
301(2)
165(3)
38(9)
83(5)
-199(10)
405(1)
109
80
TD %
Equity
14(1)
33(3)
32(2)
51(5)
47(4)
59(6)
68(7)
90(9)
71(8)
117(10)
58
55
Company
*Exxon Mobil Corporation
Royal Dutch/Shell Group of Companies
*BP plc
*ChevronTexaco Corporation
*Total S.A.
*ENI S.p.A.
*ConocoPhillips
*Marathon Oil Corporation
*Repsol YPF S.A.
*Amerada Hess Corporation
Averages
Medians
Adj.Total
Debt%
Cap.
23(1)
30(4)
28(2)
40(8)
29(3)
32(5)
38(6)
42(9)
40(7)
54(10)
36
35
Total
Debt%
Mkt.Cap.
4(2)
15(4)
2(1)
17(5)
13(3)
29(6)
32(8)
31(7)
37(9)
46(10)
23
23
Total
Cap.
104,597(2)
95,788(3)
105,569(1)
53,795(5)
52,436(6)
44,228(7)
58,645(4)
13,069(9)
29,164(8)
10,285(10)
56,758
53,116
GCE
11,437(3)
12,184(1)
12,116(2)
7,597(5)
7,478(6)
8,670(4)
4,388(7)
1,574(9)
2,966(8)
1,534(10)
6,994
7,538
RCF %
GCE
126(3)
84(8)
99(6)
77(9)
122(4)
100(5)
75(10)
95(7)
161(1)
128(2)
107
99
Number
of
Companies
Aaa
Aa
Div.Payout
(%Income)
Interest
Coverage
Total
Coverage
ROC
(Pretax)
Adj.EBIT
%ADJ.
Avg.Cap.
RCF%TD
Total Debt%
Cap.
15
Net Sales
Oper.Margin
ROS
179,170
8.4
5.8
66
15.7
9.6
19.6
17.3
93
108,122
9.4
5.1
113
11.2
9.5
15.4
14.3
53
28
50,512
4.6
-0.6
96
2.6
6.4
4.1
16
34
Baa
25,816
6.5
1.9
20
2.9
2.6
9.4
9.1
38
41
Number
of
Companies
Adj.Total
Debt%
Cap.
Total Debt%
Mkt.Cap.
Total
Cap.
GCE
RCF
%
GCE
Aaa
RCF
%
Employ
TD
%
Equity
26
10
100,192
11,810
Aa
32
16
64,007
8,965
105
75
24
99
153
38
32
58,645
47
4,388
75
38
68
Baa
46
38
17,506
2,025
128
96
93
26
Companies
Oil
Reserves
(mm BBL)
Gas
Reserves
(BCF)
Total BOE
Reserves [1]
(mm BOE)
Total
Reserves
% Oil
% Gas
Oil
Production
(mm BBL/year)
Gas
Production
(BCF/year)
[1]Total
Production
(mm BOE/year)
Aaa
11,823
55,718
21,109
56%
44%
881
4,235
1,587
13
13
Aaa
10,133
53,438
19,039
53%
47%
866
3,439
1,439
12
16
Aa1
*BP p.l.c.
9,165
48,789
17,297
53%
47%
711
3,241
1,251
13
15
Aa2
*ChevronTexaco Corporation
8,668
19,335
11,891
73%
27%
692
1,597
958
13
12
Aa2
*Total S.A.
7,231
21,575
10,827
67%
33%
580
1,654
856
12
13
Aa3
*ENI S.p.A.
3,783
18,629
6,888
55%
45%
334
1,133
523
11
16
A3
*ConocoPhillips
5,137
16,040
7,810
66%
34%
272
842
412
19
19
Baa1
Baa2
*Repsol-YPF S.A.
Baa3
720
3,377
1,283
56%
44%
75
441
149
10
2,019
18,206
5,053
40%
60%
213
853
355
21
782
2,477
1,195
65%
35%
121
288
169
Aaa
Companies
*Exxon Mobil Corporation
Oil
Production
(MBPD)
2,413.7
Gas
Production
(Mmcf/d)
11,602.7
Total
Production
(MBOE/d) [1]
4,347.5
Total Production
% Oil
% Gas
56%
44%
Aaa
2,372.6
9,421.9
3,942.9
60%
40%
Aa1
*BP p.l.c.
1,947.9
8,879.5
3,427.9
57%
43%
Aa2
*ChevronTexaco Corporation
1,895.9
4,375.3
2,625.1
72%
28%
Aa2
*Total S.A
1,589.0
4,531.5
2,344.3
68%
32%
Aa3
*ENI S.p.A.
915.1
3,104.1
1,432.4
64%
36%
A3
*ConocoPhillips
745.2
2,306.8
1,129.7
66%
34%
Baa1
205.5
1,208.2
406.8
51%
49%
Baa2
*Repsol-YPF S.A.
745.2
2,306.8
1,129.7
Baa3
331.5
789.0
463.0
66%
72%
34%
28%
Total Finding Costs Per BOE (Net Additions) Ranked by 3-Year Average ($/BOE)
Sr.
Debt
Rating
Baa2
Aa1
Aaa
A3
Aa2
Aa2
Aaa
Aa3
Baa1
Baa2
Companies
*Repsol-YPF S.A.
*BP plc
*Exxon Mobil Corporation
*ConocoPhillips
*ChevronTexaco Corporation
*Total S.A.
Royal Dutch/Shell Group of Companies
*ENI S.p.A.
*Marathon Oil Corporation (b)
*Amerada Hess Corporation (c)
Rank
1
2
3
4
5
6
7
8
-
3-Year
Avg. (a)
2.77
4.31
4.41
4.53
4.71
5.35
6.42
7.14
-
2002
4.03
3.31
4.82
5.57
5.32
5.05
8.64
8.02
4.61
n.m
2001
1.85
3.48
5.02
5.97
5.19
5.74
7.21
7.42
17.54
10.58
2000
3.69
5.34
3.44
2.94
3.30
5.27
3.08
6.21
n.m
5.13
1999
3.05
3.34
4.58
4.81
7.25
2.91
3.66
5.01
13.00
8.00
1998
23.61
4.45
5.15
12.78
4.18
3.94
3.03
6.18
6.38
5.92
1997
5.01
4.43
4.69
4.42
3.94
5.01
2.64
3.59
5.52
8.50
1996
1.15
4.85
4.07
7.52
4.30
4.20
2.01
3.16
8.44
(a) Sum of costs incurred in each year (2000-2002) divided by sum of BOE reserves added in each year (2000-202) through revisions, enhanced recoveries, extensions and discoveries, and purchases. (Historic data not
restated.)
(b) 3-year finding cost average excluded due to negative finding cost in 2000.
(c) 3-year finding cost average excluded due to negative finding cost in 2002.
Sr.
Debt
Rating
Aa1
Aa2
Aaa
Aaa
A3
Baa1
Baa2
Aa2
Aa3
Baa2
Companies
*BP p.l.c.
*Total S.A.
*Exxon Mobil Corporation
Royal Dutch/Shell Group of Companies
*ConocoPhillips
*Marathon Oil Corporation
*Amerada Hess Corporation
*ChevronTexaco Corporation
*ENI S.p.A.
*Repsol-YPF
Rank
1
2
3
4
5
6
7
8
9
10
3-Year
Avg.
2.58
2.68
3.31
3.79
4.30
4.37
4.44
4.45
4.65
5.38
2002
2.50
2.60
3.44
3.90
4.66
4.51
4.86
4.77
4.41
3.94
2001
2.69
2.81
3.27
3.59
4.29
4.22
4.40
4.49
5.06
5.97
2000
2.54
2.63
3.23
3.87
3.96
4.37
4.05
4.08
4.48
6.22
1999
2.66
2.28
3.21
3.44
3.94
3.83
3.92
3.64
3.46
3.91
1998
3.19
5.62
3.10
3.60
4.38
3.57
4.21
3.73
3.68
3.77
1997
2.45
6.44
3.07
3.54
4.16
4.04
4.95
3.94
5.95
5.30
1996
2.38
5.50
3.20
4.49
3.94
4.11
5.01
3.98
5.40
27
28
Sr.
Debt
Rating
Aaa
Aaa
Aa1
Aa2
Aa2
Aa3
Aa3
A3
A3
Baa1
Baa2
Baa3
Companies
*Exxon Mobil Corporation
Royal Dutch/Shell Group of Companies
*BP plc
*ChevronTexaco Corporation
*Total S.A.
*ENI S.p.A.
Texaco Inc.
*ConocoPhillips
Conoco Inc.
*Marathon Oil Corporation
*Repsol YPF S.A.
*Amerada Hess Corporation
Averages
Medians
5-Year
Avg.
1.61(2)
1.95(1)
0.85(3)
0.80(4)
0.61(5)
0.50(6)
0.48(7)
0.41(8)
0.26(10)
0.37(9)
2002
1.96(1)
0.97(2)
0.79(3)
0.73(5)
0.74(4)
0.47(6)
0.39(8)
0.28(9)
0.43(7)
0.24(10)
0.7
0.6
2001
1.93(2)
3.23(1)
0.75(3)
0.68(4)
0.64(5)
0.49(7)
0.55(6)
0.38(8)
0.27(9)
0.23(11)
0.25(10)
0.85
0.55
2000
1.55(2)
2.58(1)
0.71(4)
1.06(3)
0.62(6)
0.51(11)
0.68(5)
0.58(9)
0.60(8)
0.60(7)
0.20(12)
0.52(10)
0.85
0.61
1999
1.09(2)
1.51(1)
0.93(3)
0.71(4)
0.54(8)
0.56(6)
0.63(5)
0.45(9)
0.54(7)
0.45(10)
0.24(12)
0.44(11)
0.67
0.55
1998
1.51(1)
1.46(2)
1.07(3)
0.83(4)
0.52(7)
0.46(8)
0.64(5)
0.45(10)
0.55(6)
0.45(9)
0.18(12)
0.39(11)
0.71
0.54
1997
1.33(2)
1.80(1)
1.19(3)
1.02(5)
0.48(9)
0.32(11)
0.67(6)
0.62(7)
1.14(4)
0.48(8)
0.21(12)
0.44(10)
0.81
0.65
1996
1.36(2)
1.54(1)
1.10(3)
0.91(4)
0.31(9)
0.66(5)
0.63(6)
0.47(7)
0.24(10)
0.46(8)
0.77
0.65
Companies
*Exxon Mobil Corporation
Royal Dutch/Shell Group of Companies
*BP plc
*ChevronTexaco Corporation
*Total S.A.
*ENI S.p.A.
Texaco Inc.
*ConocoPhillips
Conoco Inc.
*Marathon Oil Corporation
*Repsol YPF S.A.
*Amerada Hess Corporation
Averages
Medians
5-Year
Avg.
5.45(1)
5.23(2)
2.89(4)
3.23(3)
1.94(7)
2.15(5)
1.46(9)
1.99(6)
0.80(10)
1.79(8)
2002
8.98(1)
3.34(4)
3.48(3)
3.76(2)
2.20(6)
2.24(5)
1.71(7)
1.38(9)
1.33(10)
1.42(8)
2.98
2.22
2001
4.93(2)
7.88(1)
2.08(4)
1.73(6)
1.89(5)
2.13(3)
1.07(8)
1.11(7)
0.91(10)
0.65(11)
1.03(9)
2.31
1.73
2000
7.24(2)
8.49(1)
4.23(5)
6.39(3)
2.32(11)
3.06(9)
3.64(7)
2.49(10)
4.05(6)
4.75(4)
0.82(12)
3.51(8)
4.25
3.84
1999
3.61(2)
4.24(1)
3.33(3)
3.04(4)
1.68(10)
2.38(6)
2.45(5)
1.33(11)
2.01(9)
2.03(8)
0.94(12)
2.20(7)
2.44
2.29
1998
2.50(1)
2.22(2)
1.35(4)
1.23(5)
1.63(3)
0.96(6)
0.75(10)
0.69(11)
0.94(7)
0.86(8)
0.26(12)
0.76(9)
1.18
0.95
1997
3.06(3)
4.27(1)
4.00(2)
2.47(5)
1.64(8)
1.21(10)
1.89(6)
1.45(9)
2.74(4)
1.71(7)
0.57(12)
1.15(11)
2.18
1.8
1996
5.04(1)
4.86(2)
3.84(3)
3.75(4)
1.28(9)
3.21(5)
2.51(7)
2.57(6)
0.88(10)
2.18(8)
3.01
2.89
2002
4.57(5)
3.45(8)
4.42(6)
5.15(2)
2.95(10)
4.77(4)
4.40(7)
4.92(3)
3.08(9)
5.93(1)
4.37
4.5
2001
2.56(9)
2.44(10)
2.77(7)
2.56(8)
2.97(4)
4.33(1)
1.95(11)
2.91(5)
3.44(3)
2.89(6)
4.07(2)
2.99
2.89
2000
4.66(8)
3.30(12)
5.99(5)
6.04(4)
3.72(11)
5.95(6)
5.34(7)
4.28(9)
6.72(3)
7.87(1)
4.05(10)
6.82(2)
5.39
5.65
1999
3.31(9)
2.81(12)
3.59(8)
4.31(3)
3.13(10)
4.23(4)
3.87(6)
2.95(11)
3.73(7)
4.54(2)
3.96(5)
5.01(1)
3.79
3.8
1998
1.65(6)
1.53(8)
1.26(11)
1.48(9)
3.11(1)
2.06(2)
1.18(12)
1.54(7)
1.70(5)
1.90(4)
1.43(10)
1.95(3)
1.73
1.6
1997
2.31(12)
2.37(10)
3.36(4)
2.43(8)
3.43(3)
3.80(1)
2.80(5)
2.33(11)
2.39(9)
3.56(2)
2.78(6)
2.63(7)
2.85
2.71
1996
3.71(7)
3.15(10)
3.50(9)
4.13(4)
4.06(5)
4.86(2)
4.00(6)
5.49(1)
3.68(8)
4.71(3)
4.13
4.03
Sr.
Debt
Rating
Aaa
Aaa
Aa1
Aa2
Aa2
Aa3
Aa3
A3
A3
Baa1
Baa2
Baa3
Companies
*Exxon Mobil Corporation
Royal Dutch/Shell Group of Companies
*BP plc
*ChevronTexaco Corporation
*Total S.A.
*ENI S.p.A.
Texaco Inc.
*ConocoPhillips
Conoco Inc.
*Marathon Oil Corporation
*Repsol YPF S.A.
*Amerada Hess Corporation
Averages
Medians
5-Year
Avg.
3.35(6)
2.70(10)
3.61(5)
3.91(4)
3.18(7)
4.27(3)
3.02(9)
4.54(2)
3.08(8)
4.75(1)
29
(US$ in thousands)
Reserves & Production Summary
2002
2001
2000
67,896
84.0%
16.0%
67,612
83.9%
16.1%
67,809
82.6%
17.4%
766,982
88.9%
11.1%
704,884
89.8%
10.2%
636,835
88.5%
11.5%
544,523
29.0%
522,272
25.9%
414,961
34.8%
11.3
8.0
8.0
10.4
7.7
7.8
9.4
6.1
6.2
190.5%
157.5%
201.2%
197.6%
176.9%
104.6%
802,176
9.82x
1,171,661
18.10x
1,152,474
14.64x
754,135
1,293,131
1,584,604
47.6%
1,127,955
1,003,551
1,232,406
91.5%
1,003,331
1,006,164
1,143,164
87.8%
$16.83
$10.64
$23.02
$16.37
$21.85
$15.83
$3.70
$1.31
$1.01
$0.16
$6.18
$6.58
$12.77
$4.00
$1.68
$0.80
$0.16
$6.65
$6.17
$12.82
$3.48
$1.37
$1.00
$0.16
$6.01
$3.54
$9.55
1.62x
1.79x
2.65x
2.81x
4.48x
4.81x
$6.93
$6.28
$6.75
$7.87
$7.78
$5.45
$2.91
$2.82
$2.36
$2.69
$2.75
$2.61
Unit Economics
30
2002
2001
2000
3.3%
1.8x
11.4x
2.4%
6.6
$443
4.8%
2.2x
18.1x
3.6%
3.0
$417
13.5%
4.1x
4.9x
10.1%
6.4
$387
10.9%
3.0x
8.0x
7.4%
13.3
$156
2.5%
2.1x
4.8x
0.7%
7.7
$230
-6.3%
-4.8x
-10.2x
-2.1%
10.1
$256
15.2%
10.2x
3.9x
5.0%
13.0
$219
9.8%
4.3x
5.5x
3.0%
11.5
$266
10.7%
4.5x
4.2x
3.5%
1.5
$356
-0.3%
0.7x
15.8x
-0.1%
2.2
$372
12.9%
4.9x
3.8x
4.4%
4.8
$360
15.9%
7.5x
2.8x
4.5%
1.9
$300
9.0%
3.4x
5.7x
3.4%
10.8
$403
3.5%
1.5x
17.2x
1.7%
13.3
$424
11.2%
7.9x
7.9x
6.7%
13.8
$483
17.8%
5.9x
3.6x
4.2%
3.7
$210
Ashland Inc.
Adj. EBIT/Adj. Avg. Capitalization
Fixed Charge Coverage
Adjusted Debt/RCF
Adj. EBIT/Revenues
Working Capital Days (A/R+Inv-A/P)
Adj. Debt/Complexity Barrels
Sunoco Inc.
EBIT/Adj. Avg. Capitalization
Fixed Charge Coverage
Adjusted Debt/RCF
EBIT/Revenues
Working Capital Days (A/R+Inv-A/P)
Adj. Debt/Complexity Barrels
31
To order reprints of this report (100 copies minimum), please call 1.212.553.1658.
Report Number: 80355
Authors
AVP/Analyst
Thomas S. Coleman
Hugh O. Scott
Alba Ruiz
Copyright 2003, Moodys Investors Service, Inc. and/or its licensors including Moodys Assurance Company, Inc. (together, MOODYS). All rights reserved. ALL INFORMATION
CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER
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32