CHICAGO--(BUSINESS WIRE)--According to a new report issued by Fitch Ratings, higher year-over-year crude and natural gas prices in 2010 may reduce the size of reported Asset Retirement Obligations (AROs) for upstream U.S. oil & gas producers, by extending existing field lives and thereby delaying the remediation costs and associated present value of related retirement obligations. However, other longer term factors remain in play in the sector which are likely to continue to add pressure to the growth of future AROs, including inflation in key input costs, a push by the industry into the offshore, and increased offshore regulations, especially in the Gulf of Mexico (GoM) following the Deepwater Horizon spill.
Growth in AROs is likely to continue to vary widely by company and upstream portfolio mix, with integrateds and larger independents, the group whose growth prospects are most clearly tied to offshore and deepwater prospects, likely to see the largest growth in AROs relative to debt, while purely domestic onshore names are expected to show more modest growth in AROs relative to debt.
AROs are a key liability for exploration & production (E&P) balance sheets which can have a wide-range of potential credit impacts. In terms of liquidity, lower-rated or smaller producers may be required to provide assurance to regulators or other parties that they are financially able to meet future remediation costs through Letters of Credit (LOCs), surety bonds, or other assurances, all of which can lower liquidity. AROs are also a factor in the consideration received for a property in a sale. However, it is important to note that AROs also have characteristics of 'soft obligations'--unlike straight debt for example, an ARO can be effectively deferred through a successful drilling program which extends the life of an existing field and therefore delays the ultimate date of site remediation.
The special report 'Asset Retirement Obligations: Short-Term Relief, Longer-Term Pressure?' is available on Fitch's website: www.fitchratings.com.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research: Asset Retirement Obligations: Short-Term Relief, Longer-Term Pressure?
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=600105
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