Research: Rating Action: Moody’s affirms JAPEX’s Baa1 rating; outlook remains stable


Tokyo, June 30, 2022 — Moody’s Japan KK has affirmed Japan Petroleum Exploration Co., Ltd.’s (JAPEX) Baa1 issuer rating and baa3 baseline credit assessment (BCA).

The outlook remains stable.

RATINGS RATIONALE

“The affirmation of JAPEX’s issuer rating reflects the company’s solid credit profile and conservative financial policy,” says Roman Schorr, a Moody’s Vice President and Senior Analyst.

“JAPEX’s disciplined capital allocation will support free cash flow generation, and its ample cash should limit increases even as the company seeks to invest in new exploration and production (E&P) projects and expand its non-E&P businesses,” adds Schorr.

JAPEX’s BCA is supported by the company’s essential role in Japan’s energy supply and its conservative financial policy, as reflected in its low leverage. Moody’s expects JAPEX to maintain its strong leverage and coverage metrics over the next two to three years broadly in line with its metrics in fiscal 2021, which ended in March 2022. JAPEX has repaid substantially all its debt after it divested its interests in Canadian oil and gas projects in fiscal 2021, and maintains cash balances well in excess of its debt.

This strong balance sheet and cash balance provide significant headroom for the company to invest in new E&P projects while strengthening its non-E&P businesses without relying on debt financing. Moody’s expects JAPEX to cover such investments and distributions to shareholders primarily with its operating cash flow.

However, JAPEX’s small scale is a rating constraint as an E&P company. JAPEX is the second-largest E&P oil and gas company in Japan, after the significantly larger INPEX CORPORATION (A2 stable). The company is also the smallest among its global E&P peers at the Baa level. Its average daily production decreased to 62,000 barrels of oil equivalent per day (BOE/D) in fiscal 2021, down from 76,000 BOE/D in fiscal 2020, following the divestiture of its projects in Canada. Its modest reserves and production base has made JAPEX vulnerable to recurrent net losses and less profitable than its larger global peers.

JAPEX’s natural gas pipelines provide essential energy infrastructure in northern Japan. This utility-like business generates stable pipeline transport fees that mitigate the company’s exposure to oil and LNG prices and the risks arising from the modest scale of its E&P operations. The company is aiming to derive 40% of operating profit and income from equity-method subsidiaries in fiscal 2026 and 50% from its non-E&P businesses in fiscal 2030, up from an average of around 37% in the last three fiscal years. Moody’s expects JAPEX’s infrastructure business to remain a source of relatively stable cash flow. At the same time, diversification to expand new non-E&P businesses presents event and execution risk, and related investments could entail debt.

The Japanese government directly owns about 35% of JAPEX’s shares. Moody’s incorporates this government ownership in its analysis of the uplift provided to JAPEX’s rating, based on the company’s status as a government-related issuer (GRI).

JAPEX’s Baa1 issuer rating incorporates its BCA of baa3 and a two-notch uplift based on the company’s high dependence on the government and the strong probability of extraordinary support from the Government of Japan (A1 stable) if needed, under Moody’s joint-default analysis ( JDA) for GRIs.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody’s expectation that JAPEX will adhere to its conservative financial policy, including a sustained net cash position, and control its debt levels to contain commodity price volatility and execution risk from its new projects and businesses such as in renewables.

An upgrade of JAPEX’s rating is unlikely in the foreseeable future because of the company’s small scale relative to its E&P peers and the expectation of diversification.

That said, Moody’s could upgrade the rating if the company significantly increases its production and reserves and successfully diversifies into other businesses while maintaining a conservative financial profile. Positive rating pressure could also build if the government enhances its support for JAPEX, such as through legal guarantees.

On the other hand, Moody’s could downgrade the rating if (1) JAPEX’s leverage and cash flow metrics deteriorate, such that its retained cash flow (RCF)/debt is below 25% on a sustained basis; (2) its business risks stemming from new investments increase; or (3) the government becomes less supportive of the company. A decline in our JDA assessment, such as a weakening in the support factor because of an adverse change in government support , could reduce the GRI uplift and therefore the issuer rating. The rating could also be negatively pressured if the Japanese government’s outlook is changed to negative or its rating is downgraded.

The methodologies used in these ratings were Independent Exploration and Production (Japanese) published in August 2021 and available at https://ratings.moodys.com/api/rmc-documents/74845and Government-Related Issuers Methodology (Japanese) published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/66606. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.

Headquartered in Tokyo, Japan, Japan Petroleum Exploration Co., Ltd. is the second-largest oil and gas exploration and production company in Japan.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Roman Schorr
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Japan KK
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Mihoko Manabe
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Release Office:
Moody’s Japan KK
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

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