Moody’s worried about Inpex cost overruns

Credit rating agency Moody’s said it has changed its outlook on Japan’s Inpex to negative from stable.

The change of outlook to negative primarily reflects the uncertainties generated by the delay in the start-up of production and cost overruns at the company’s giant Ichthys LNG project in Australia, Kailash Chhaya, a Moody’s Vice President and lead analyst for Inpex said.

“In addition, Moody’s considers that the headroom within the company’s current rating has been reduced by weak earnings in the current low oil price environment and the increasing level of liabilities related to Ichthys,” adds Chhaya.

Inpex announced last week that the start of production at Ichthys will be delayed to the third quarter of 2017, from the expected start date of end-2016. As of June 2015, the project’s overall development was approximately 74% complete. But, a detailed review of its schedule prompted the company to revise the start date.

The company also said that various factors, including the delayed production start, will increase by 10% the total project investment, estimated at the time of the final investment decision in January 2012.

Inpex will also likely increase its borrowings to cushion the impact of low oil prices and to fund the additional costs of the project, which will raise adjusted debt/EBITDA leverage. As of 31 March, Inpex’s adjusted debt/EBITDA leverage, calculated after treating its Ichthys-related completion guarantees as debt, stood at 2.6x, Moody’s said.

Ichthys is critical to Inpex’s goal of expanding its daily production capacity to an equivalent of 1 million barrels per day, 2.5x its current level, in the next 10 years. At its peak capacity, the company estimates that Ichthys will supply about 10% of Japan’s annual LNG import volume.

Moody’s said it recognizes Inpex as a government related issuer (GRI), based on direct (19%) and indirect (2%) ownership of approximately 21%, as well as on the government’s ownership of a special-class share, or a golden share. When considering the rating of GRIs, Moody’s applies a joint default analysis (JDA) composed of four factors: a baseline credit assessment (BCA), the related government’s credit quality, its default dependence, and its support probability.

Moody’s has assessed Inpex’s BCA as baa1. If leverage increases due to the planned investments in the Ichthys and Abadi projects, then the opportunity for a ratings upgrade is limited, it  added.

The credit quality of the Japanese government, as the potential support provider to the issuer, is A1 with a stable rating outlook.

Image: Inpex