Higher oil prices that could potentially result from new US and European Union (EU) economic sanctions against Iranian oil exports would be credit-positive for international oil companies (IOCs) overall, but negative for corporate sectors such as airlines, oil refining, European autos and Retail, says Moody's Investors Service in two new reports published on Tuesday.
However, Moody's points out that the risk of a $150 bbl oil price resulting from Iran blocking the Strait of Hormuz, a key export route for oil & gas producers, is low because the blockade would be short-lived.
The two new Moody's reports, entitled " Global Non-Financial Corporates: Airlines, Oil Refining, European Autos and Retail at Risk in $150bbl Oil Price Scenario" and "Global Oil & Gas companies: Sanctions Against Iran Would Benefit Upstream Oil Ops And Hurt Downstream".
"As most IOCs have no or very limited exposure to Iran in terms of their overall production, higher prices triggered by a supply squeeze from the sanctions on Iran would benefit their oil exploration and production (upstream) operations considerably,"says Olivier Beroud, Moody's London-based Managing Director for EMEA Corporates. According to Moody's, these gains would more than offset any adverse effects on IOCs' refining (downstream) businesses, which typically account for a much smaller portion of their total operating profits and cash flows.
"However, an oil shock resulting from a US/EU economic confrontation with Iran would ripple throughout other industries around the world -- and could also derail the global recovery," cautions Steven Wood, Moody's NY-based Managing Director for US corporates. Moody's defines an "oil shock" as a period lasting at least several months during which oil prices rise to a sustainable $150 per barrel (bbl). The rating agency has identified the following sectors as potentially being hardest-hit in such a scenario:
• European automakers would face a greater risk from an oil shock than their US or Asian counterparts, although profits and cash generation for US automakers would also come under great pressure.
• Airlines would suffer operating losses from sustained higher costs for jet fuel, and the fare increases that result would hurt passenger demand worldwide. European airlines face more exposure to any political instability in the Middle East than their US or Asian counterparts.
• Retailers, restaurants and other industries that depend on discretionary spending would suffer if fuel prices surged for consumers. Rising transportation and distribution costs would weaken revenues for European retailers. Makers of consumer durables would also see pressure from reduced consumer demand and higher raw-material prices. However in the US, big-box discount retailers and warehouse clubs including Wal-Mart, Target, Costco and BJ's Wholesale could benefit as consumers economize.
"The magnitude of oil price increases linked to the EU and US sanctions, which take effect from June, will depend in part on how strictly they are adhered to," says David Staples, Managing Director for GCC corporates based at Moody's Dubai office. At this stage, it is unclear to what degree Iran's top customers will reduce their imports in order to avoid the sanctions. (The US sanctions stipulate that countries only have to cut their purchases "substantially" to be exempt.) Other major oil-producing countries have capacity to cover the loss of supply from Iran, although it will take time for this to become operational.
Separately, ongoing tensions across Middle East and North Africa (MENA) continue to create uncertainty for IOCs:
• In Syria, rated IOCs have already ceased production in accordance with EU sanctions. However, this is unlikely to have a significant bearing on IOCs' output as they have very limited exposure to the country.
• In Yemen, the operating environment is likely to remain uncertain in the face of ongoing security threats from militant groups.
• Although Egypt's political situation remains unsettled, for now rated IOCs are not experiencing any disruption to their output.
• However, Libyan oil production is coming back on stream faster than expected. Eni S.p.A. (A2/ negative), which has the largest exposure to Libya among IOCs rated by Moody's, expects its production to return to pre-civil war levels by around the middle of this year, while OMV AG (A3/stable) and Repsol YPF S.A. (Baa2/review for downgrade) are rapidly ramping up their production in Libya.