Oil Price Plunge Delivers Mixed Results for Australia

The plunge in oil prices since mid-2014 will lift airline profitability, ease pressure on mining companies, perk up retailers, but strain the oil and gas sector, Moody's Investors Service said in its analytical report "Low Oil Price Will Lift Airline Profitability; Pressure Oil and Gas Producers" authored by Maurice O'Connell and Matthew Moore, both Moody's Vice Presidents.

 

"The benchmark Brent crude price plunge will boost Australian airlines' profitability, cash flows and credit metrics into 2016, but the mining sector will benefit to a lesser degree," O'Connell said. "We also expect building construction companies to see modest knock-on effects."

 

Jet fuel and labor are the two largest input costs for airlines—fuel costs accounted for 30% of Qantas Airways Ltd. (Ba1 negative) and Virgin Australia Holdings Limited (B2 stable) operating costs over the past three years—so lower fuel costs will improve profitability, according to Moody's.

 

The rating agency notes that this strengthened profitability, combined with improving conditions in the carriers' operating environment, ongoing cost reductions and rising yields, will lead to improvements in cash flow generation and credit metrics for the sector.

 

In addition, Australian retailers such as Wesfarmers Limited (A3 stable) and Woolworths Limited (A3 stable) will see mildly positive impact from higher disposable incomes and lower logistics costs, Moody's said.

 

Australian miners—such as BHP Billiton Limited (A1 stable) Fortescue Metals Group Ltd (Ba1 stable) and Newcrest Mining Ltd. (Baa3 negative)—will benefit from the lower costs tied to the oil prices decline at a time when earnings and margins have been hit significantly by a sharp deterioration in metals and bulk commodities prices. The lower costs won't, however, be sufficient to offset weak prices for base metals, iron ore and coal, said Moody's.

 

"However, the oil and gas sector will see a direct negative impact on revenues and cash flows as lower selling prices for oil narrow margins for upstream producers," O'Connell added.

 

Moody's expects that the crude oil price drop will lower exploration and production behemoth Woodside Petroleum Ltd's (Baa1 stable) revenue by 30%-35% over the next two years, based on the rating agency's oil price assumptions. BHP Billiton's revenue will also be hit, although its overall operating performance will benefit from its other, more resilient divisions.

 

Oil services companies, and engineering and construction companies will also feel some negative impact. Moody's notes that equipment rental company, Emeco Holdings Limited (B3 negative), which generates about 30% of revenue from equipment hire to Canadian oil sands companies, and construction services company, Transfield Services Ltd (Ba2 stable), will  both see their earnings pressured by reduced demand and narrower margins  as producers look to cut capital spending.