Published: February 01, 2011
Fitch: Higher Crude & Natural Gas Prices May Help Relieve AROs for U.S. Oil & Gas Producers
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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE.
Fitch Ratings
Mark C. Sadeghian, CFA, +1-312-368-2090
Senior
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL
60602
or
Sean T. Sexton, CFA, +1-312-368-3130
Managing
Director
or
Media Relations
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com
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