CHICAGO--(BUSINESS WIRE)--Link to Fitch Ratings' Report: $150 per Barrel Crude Oil: Credit
Implications across the Corporate Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=515225
The ongoing political unrest across the Middle East and North Africa and the threat of further contagion impacting major oil producing states has increased the probability of a significant crude spike scenario, according to Fitch Ratings. Political unrest, which has led to regime change in Tunisia and Egypt, has now significantly impacted production and exports from Libya, with operational disruptions reported by ENI Spa, Total, Repsol YPF, and OMV AG, among others. Market concerns center on the duration of the disruption in Libya, and the potential for contagion to spread further and impact production among other key producers in the region.
Fitch's earlier special report, '$150 Crude Oil: Implications Across the Corporate Sector', which was published May 3, 2010 examined in detail the potential credit implications of a scenario in which crude oil spiked to $150 barrel.
Among the principal findings of that report, which remain relevant in the current context, are the following:
--The impact of higher oil prices varies but is most significant for firms in the transportation, chemicals and consumer products industries.
--The sectors most vulnerable to a crude spike include airlines (due to high operating cost exposure to jet fuel and limited hedges); trucking (the relative fuel inefficiency of moving goods by truck is magnified under higher diesel prices); commodity chemicals (sensitive to oil-based feedstock pricing, but with cheap natural gas a partial mitigant to higher oil prices); and consumer goods (notable exposure to resin-intensive business lines and inability to efficiently hedge oil-derivative inputs).
--Beneficiaries of a crude oil spike include ethanol producers (due to that product's rising value as a gasoline blendstock during a crude spike), and railroads (double benefit of fuel cost savings, and potential for higher traffic due to dollar depreciation-linked exports).
--An important credit consideration for most sectors across the space is the degree to which companies have already performed aggressive adjustments to maintain margins and financial flexibility in response to the last crude oil run-up and subsequent recession. These actions included workforce reductions, general and administrative cuts, facility closures, reductions in discretionary capital expenditures, lower dividends, and changes to healthcare and pension benefit programs, among others. As a result, the ability to offset a future spike in energy input costs through further restructurings in other parts of the business is limited at this point in the cycle, as the low-hanging fruit have already been plucked.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Political Turmoil in North Africa and the Middle East - Implications for North American Upstream Companies' (Feb. 25, 2011);
--'Political Unrest May Affect Selected European Oil & Gas Companies', (Feb. 24, 2011).
Applicable Criteria and Related Research:
Political Turmoil in North Africa and the Middle East (Implications for North American Upstream Companies)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=608025
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