CORPORATES OCTOBER 3, 2016 RATING METHODOLOGY Global Integrated Oil & Gas Industry Table of Contents: SUMMARY 1 ABOUT THE RATED UNIVERSE 3 ABOUT THIS RATING METHODOLOGY 4 DISCUSSION OF THE GRID FACTORS 6 ASSUMPTIONS AND LIMITATIONS, AND RATING CONSIDERATIONS THAT ARE NOT COVERED IN THE GRID 15 OTHER RATING CONSIDERATIONS 17 APPENDIX A: GLOBAL INTEGRATED OIL AND GAS METHODOLOGY FACTOR GRID 19 APPENDIX B: INTEGRATED OIL AND GAS INDUSTRY OVERVIEW 21 MOODY’S RELATED RESEARCH 22 Analyst Contacts: NEW YORK Pete Speer Senior Vice President peter.speer@moodys.com +1 212 553.4565 +44.207.772.5454 Elena Nadtotchi +44 .207.772.5380 Vice President - Senior Credit Officer elena.nadtotchi@moodys.com MOSCOW Summary This rating methodology explains Moody’s approach to assessing credit risk for companies in the global integrated oil and gas industry. This document is intended to provide general guidance that helps companies, investors, and other interested market participants understand how qualitative and quantitative risk characteristics are likely to affect rating outcomes for companies in the integrated oil and gas industry. This document does not include an exhaustive treatment of all factors that are reflected in Moody’s ratings but should enable the reader to understand the qualitative considerations and financial information and ratios that are usually most important for ratings in this sector. 1 +1.212.553.1653 Steven Wood +1.212.553.0591 Managing Director - Corporate Finance steven.wood@moodys.com LONDON This rating methodology replaces “Global Integrated Oil & Gas Industry” last revised on April 30, 2014. We have updated some outdated links and removed certain issuer-specific information. +7.495.228.6060 This report includes a detailed rating grid which provides a reference tool that can be used to approximate credit profiles within the integrated oil and gas industry in most cases. The grid provides summarized guidance for the factors that are generally most important in assigning ratings to companies in the integrated oil and gas industry. However, the grid is only a summary and does not include every rating consideration. The weights shown for each factor in the grid represent an approximation of their importance for rating decisions but actual importance may vary substantially. Our ratings in this sector also consider how performance of integrated oil and gas producers can fluctuate over the commodity cycle. As a result, the grid-indicated rating is not expected to match the actual rating of each company in each case. Denis Perevezentsev +7.495.228.6064 Vice President-Senior Credit Officer denis.perevezentsev@moodys.com » contacts continued on the last page 1 This update may not be effective for some regulatory jurisdictions until certain requirements are met, such as local language translation. CORPORATES The grid contains five factors that are important in our assessments for ratings in the integrated oil and gas sector: 1. Scale 2. Business Position 3. Profitability and Returns 4. Financial Policy 5. Leverage and Coverage Some of these factors also encompass a number of sub-factors. An issuer’s scoring on a particular grid factor or sub-factor often would not necessarily match its overall rating. This rating methodology is not intended to be an exhaustive discussion of all factors that our analysts consider in assigning ratings in this sector. We note that our analysis for ratings in this sector covers factors that are common across all industries such as ownership, management, liquidity, corporate legal structure, governance and country related risks which are not explained in detail in this document, as well as factors that can be meaningful on a company-specific basis. Our ratings consider these and other qualitative considerations that do not lend themselves to a transparent presentation in a grid format. The grid used for this methodology reflects a decision to avoid greater complexity that would result in grid-indicated ratings that map more closely to actual ratings in favor of a simpler and more transparent presentation. Highlights of this report include: » A summary of the rating methodology » A description of factors that drive credit quality » Comments on the rating methodology assumptions and limitations, including a discussion of rating considerations that are not included in the grid The appendices show the complete rating grid (Appendix A) and a brief industry overview (Appendix B). 2 This methodology describes the analytical framework used in determining credit ratings. In some instances our analysis is also guided by additional publications which describe our approach for analytical considerations that are not specific to any single sector. Examples of such considerations include but are not limited to the assignment of short-term ratings, the relative ranking of different classes of debt and hybrid This publication does not announce securities, how sovereign credit quality affects non-sovereign issuers, and the assessment of credit support a credit rating action. For any credit ratings referenced in this from other entities. Documents that describe our approach to such cross-sector methodological publication, please see the ratings considerations can be found here. tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 In general, the grid-indicated rating is oriented to the Corporate Family Rating (CFR) for speculative-grade issuers and the senior unsecured rating for investment-grade issuers. Individual debt instrument ratings also factor in decisions on notching for seniority level and collateral. For issuers that benefit from ratings uplift due to parental support, government ownership or other institutional support, the grid-indicated rating is oriented to the baseline credit assessment. For an explanation of baseline credit assessment, please refer to our rating methodology on government-related issuers. Individual debt instrument ratings also factor in decisions on notching for seniority level and collateral. The documents that provide broad guidance for these notching decisions are our rating methodologies on loss given default for speculative grade non-financial companies and for aligning corporate instrument ratings based on differences in security and priority of claim. The link to these and other cross-sector methodologies can be found in the Related Research section of this report. 2 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES About the Rated Universe This methodology is applicable to companies that have integrated oil and gas operations ranging from upstream (exploration and production) to downstream (refining and marketing), and in some cases midstream (pipelines and transportation, including LNG and oil shipping) and chemicals. The rated universe of companies is currently comprised of (1) the large majors and super-majors,; (2) smaller and/or more aggressively leveraged players with some regional concentration; and (3) national oil companies or other regionally concentrated companies, often with significant scale and political position, but with ratings primarily driven by geopolitical or sovereign-linked factors. 3 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES About This Rating Methodology This report explains the rating methodology for integrated oil and gas companies in six sections, which are summarized as follows: 1. Identification and Discussion of the Grid Factors The grid in this rating methodology contains five factors that represent some of the key analytical considerations for assigning ratings. These five broad factors are further broken down into ten sub-factors. For each of these factors and sub-factors, we assign a weight in the grid that reflects the relative importance that usually applies for issuers in this sector. EXHIBIT 1 Global Integrated Oil and Gas Industry Broad Rating Factors Scale Factor Weighting Rating Sub-Factor Sub-Factor Weighting 25% Average Daily Production (mboe/day) 10% Proved Reserves (mmboe) 10% Crude Distillation Capacity (mbbls/day) Business Position 20% Business Position Profitability and Returns 10% EBIT/Average Book Capitalisation 5% 20% 5% Downstream EBIT/Total Throughput Barrels ($/bbl) 5% Financial Policy 20% Financial Policy 20% Leverage and Coverage 25% EBIT / Interest Expense 7.5% Total Retained Cash Flow / Net Debt 10% Debt / Book Capitalization 7.5% 100% Total 100% 2. Measurement or Estimation of Factors in the Grid We explain our general approach for scoring each grid factor and show the weights used in the grid. We also provide a rationale for why each of these grid components is meaningful as a credit indicator. The information used in assessing the sub-factors is generally found in or calculated from information in company financial statements, derived from other observations or estimated by Moody’s analysts. Our ratings are forward-looking and reflect our expectations for future financial and operating performance. However, historical results are helpful in understanding patterns and trends of a company’s performance as well as for peer comparisons. Rating committees may find it analytically useful to examine both historic and expected future performance for periods of several years or more. All of the quantitative credit metrics incorporate Moody’s standard adjustments to income statement, cash flow statement and balance sheet amounts for various items that may relate to restructuring, impairment, off-balance sheet accounts, receivable securitization programs, under-funded pension obligations, and recurring operating leases. 3 3 Financial statement adjustments that we use for non-financial corporates can be found in Cross-Sector Methodologies accessed through the link in Related Research. Definitions of Moody’s most common ratio terms may be accessed through a separate link in the Related Research section. 4 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES 3. Mapping Grid Factors to the Rating Categories After estimating or calculating each sub-factor, the outcomes for each of the sub-factors are mapped to a broad Moody’s rating category (Aaa, Aa, A, Baa, Ba, B, Caa, or Ca). 4. Assumptions and Limitations and Rating Considerations Not Included in the Grid This section discusses limitations in the use of the grid to map against actual ratings, some of the additional factors that are not included in the grid but can be important in determining ratings, and limitations and assumptions that pertain to the overall rating methodology. 5. Determining the Overall Grid-Indicated Rating To determine the overall grid-indicated rating, we convert each of the sub-factor ratings into a numeric value based upon the scale below. EXHIBIT 2 Numeric Rating Value Aaa Aa A Baa Ba B Caa Ca 1 3 6 9 12 15 18 20 The numerical score for each sub-factor is multiplied by the weight for that sub-factor with the results then summed to produce a composite weighted-factor score. The composite weighted factor score is then mapped back to an alphanumeric rating based on the ranges in the table below. 5 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES EXHIBIT 3 Mapping of Total Factor Scores Grid-Indicated Rating Aggregate Weighted Total Factor Score Aaa x < 1.5 Aa1 1.5 ≤ x < 2.5 Aa2 2.5 ≤ x < 3.5 Aa3 3.5 ≤ x < 4.5 A1 4.5 ≤ x < 5.5 A2 5.5 ≤ x < 6.5 A3 6.5 ≤ x < 7.5 Baa1 7.5 ≤ x < 8.5 Baa2 8.5 ≤ x < 9.5 Baa3 9.5 ≤ x < 10.5 Ba1 10.5 ≤ x < 11.5 Ba2 11.5 ≤ x < 12.5 Ba3 12.5 ≤ x < 13.5 B1 13.5 ≤ x < 14.5 B2 14.5 ≤ x < 15.5 B3 15.5 ≤ x < 16.5 Caa1 16.5 ≤ x < 17.5 Caa2 17.5 ≤ x < 18.5 Caa3 18.5 ≤ x < 19.5 Ca x ≥ 19.5 For example, an issuer with a composite weighted factor score of 11.7 would have a Ba2 grid-indicated rating. We used a similar procedure to derive the grid indicated ratings shown in the illustrative examples. 6. Appendices The Appendices provide additional commentary and insights on our view of credit risks in this industry. Discussion of the Grid Factors The grid for integrated oil and gas companies focuses on five broad factors: 6 OCTOBER 3, 2016 1. Scale 2. Business Position 3. Profitability and Returns 4. Financial Policy 5. Leverage and Coverage RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Factor 1: Scale (25% Weight) Why it Matters Scale is a very important rating factor. Larger integrated oil and gas companies benefit from greater asset diversification, financial resources and liquidity, and economies of scale. They can withstand shocks or downturns better than smaller firms. Size also tends to strongly correlate with other positive characteristics such as operating success, longevity, and diversification, whether it is geographic, by commodity, by price realizations, etc. How We Assess it For the Grid Scale is measured (estimated in the case of forward-looking expectations) using proved reserves, average daily production and total crude distillation capacity. Proved Reserves Proved reserves represent a store of current and future value that can be quantified and compared among companies. For credit purposes, we rely only on proved reserves, which is consistent with industry lending practices and conservatism in evaluating debt protection (as opposed to equity valuation, which focuses on upside growth potential). Proved reserves are estimated by petroleum engineers who are either company employees or external reserve engineers. They come from known reservoirs and can be produced with "reasonable certainty" under current pricing and technological operating assumptions. For financial reporting, reserve estimates are generally prepared annually and disclosed as supplements to the financial statements. Average Daily Production Production is the source of current cash flow and, in contrast to reserves, can be measured very accurately via regular reporting of revenues and volumes in the financial statements. Assessing a company’s production and sources of projected growth is essential to judging credit risk. As with reserves, large production is a distinguishing characteristic for the integrated companies. They typically have a mature and diversified base of stable cash generating fields that underpins drilling programs and capital investment. Companies can project production out three to five years with some degree of visibility based on current development projects and identified discoveries. Crude Distillation Capacity Crude distillation capacity is a good proxy for the scale of the overall downstream operations. Most integrated companies also have sizable retail marketing operations that are closely integrated with their refining systems. While crude distillation capacity is not a guarantee of acceptable returns in an industry that is susceptible to excess capacity, size is critically important since it typically implies economies of scale in a business with high fixed costs, and provides opportunities to leverage critical mass to benefit from supply synergies. Scale also tends to imply diversification for companies with a number of large refineries and an extensive chain of retail outlets. Conversely, other measures such as market share, while sometimes useful, may not adequately reflect a company's bargaining clout in highly commoditized markets. 7 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES FACTOR 1 Scale (25%) Sub-Factor Sub-factor Weight Aaa Aa A Baa Ba B Caa Ca Average Daily Production (mboe/day) 10% ≥2,750 1,100 – 2,750 550 – 1,100 140 - 550 55 - 140 20 - 55 10 - 20 <10 Proved Reserves (mmboe) 10% ≥10,000 5,000 - 10,000 2,000 -5,000 500 - 2,000 100 - 500 30 - 100 10 - 30 <10 5% ≥3,000 2,000 - 3,000 1,000 - 2,000 500 - 1,000 250 - 500 50 - 250 25 - 50 <25 Crude Distillation Capacity (mbbls/day) Factor 2: Business Position (20% Weight) Why it Matters The Business Position factor is an indicator of the capacity of an integrated oil and gas company to generate large, recurrent and diversified streams of operating cash flow in order to support the execution of complex, capital intensive projects and sustain its business model in the long term. In considering the business position of an integrated oil and gas company, Moody’s focuses on the size and diversity of its hydrocarbon resource base, the breadth and depth of its project execution capabilities and technological know-how, and the degree of its integration along the oil and gas value chain. How We Assess it For the Grid Size and Diversity of Hydrocarbon Base To assess the strength of the hydrocarbon resource base of an integrated oil and gas company, Moody’s considers a range of factors characterizing its oil and gas upstream asset portfolio. While proved reserves constitute the most reliable indicator of a company’s cash generating capacity in the near to intermediate term, other commercial reserves that have yet to be proven as well as contingent resources provide a useful pointer for the company’s ability to access resources and replenish proved reserves, which will underpin its production profile in the longer term. Also, while unproven reserves and contingent resources typically consume as opposed to generate cash, they constitute a store of value and source of additional financial flexibility for the company, which can be realized through the monetization of assets at different stages of the life of a project. It is also important to consider the geological make-up and geographical diversity of the company’s asset base. The large integrated companies tend to operate in more geographic areas and geologic basins, providing significant protection from a range of industry conditions such as lower commodity prices, downstream margin squeezes, unexpected internal or political disruptions to operations, quality or basis (location) differentials that affect realized prices, rising oil field service or other cost inputs, and so on. Project Execution Capabilities As conventional oil basins are becoming depleted, integrated oil and gas companies have, in recent years, undertaken increasingly complex upstream projects as well as ventured into new oil frontiers and more hostile operating environments. However, operating in the harsh arctic environment or deep- and ultra-deepwater of the US Gulf of Mexico, West Africa and Brazil’s offshore pre-salt oilfields, presents integrated oil and gas companies with some significant technical challenges and entails higher execution risks. Also, the development of unconventional 8 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES resources such as oil sands and integrated gas projects are typically highly capital intensive, have long lead times and require considerable upfront investment. In this context, considerable technological expertise and extensive project management skills are required to execute these highly complex projects in a safe manner as well as deliver the costly projects on time and budget in order to achieve the attractive economic returns underpinned by the large size and commercial materiality of the oilfields under development. In more mature hydrocarbon provinces such as the North Sea or Western Siberia, the ability of operators to apply the latest enhanced oil-recovery techniques can also help extend the production profile of existing oilfields and significantly improved recovery rates. Integration Along the Oil and Gas Chain We view favorably operating profiles, which display a high degree of integration along the oil and gas chain. This helps companies not only capture additional value for their stakeholders, but also diversify their sources of earnings and mitigate the inherent exposure of their upstream activities to oil and gas price volatility. The global liquefied natural gas (LNG) market has been expanding rapidly on the back of rising demand from developing economies in Asia and Latin America, and environmental policies calling for less power generation from oil, coal, and nuclear energy in favor of “cleaner” energy like natural gas. Integrated oil and gas companies, which hold strong positions in the LNG market and can demonstrate the technological expertise and financial wherewithal to bring to market the vast quantities of stranded natural gas located in regions such as the Middle East, Australia and East Africa, are best placed to further capitalize on the continuing growth of this segment. While integrated gas projects are highly capital intensive and have long lead times, they typically enjoy longer plateau production profiles than more traditional E&P developments. They generate utility-like returns and offer above-average earnings and cash flow visibility. Furthermore, companies, which own the entire value chain, including the production, liquefaction, shipping and regasification, can arbitrage wide price differentials among the principal LNG markets in Asia, Europe, and the Americas. Such vertical integration allows them to take the lowest-cost supply to the highest-price market. They can also take advantage of their market intelligence, a competitive edge in a business with transactions conducted under private contracts that produce limited pricing information. While we view refining activities per se as carrying high business risk given the volatility affecting refining margins, on an integrated basis, downstream activities provide balance that is supportive to an integrated petroleum company's business risk profile. Downstream activities provide diversification and, to some degree, a hedge against crude oil price movements, economies of scales, and the opportunity to capture the complete value chain and incremental profit margin via integration of upstream production with downstream refining, distribution and marketing. Therefore, the scale and efficiency of refining and marketing assets as well as strong oil product brand recognition are significant considerations for our credit assessment of integrated oil companies. 9 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES FACTOR 2 Business Position (20%) Factor Weight Business Position 20% Aaa Aa A Baa Ba B Caa Ca Extremely large and diversified hydrocarbon resource base; superior upstream project execution capabilities underpinned by technological leadership; extensive integration along the oil and gas value chain supported by a global LNG portfolio, highly efficient/worldscale refineries and leading marketing positions worldwide. Very large and diversified hydrocarbon resource base; very strong upstream project execution capabilities underpinned by technological leadership; very strong integration along the oil and gas value chain supported by a very large LNG portfolio, highly efficient/large refineries and leading marketing positions in several regions. Large and diversified hydrocarbon resource base; strong upstream project execution capabilities underpinned by technological leadership; strong integration along the oil and gas value chain supported by a sizeable LNG portfolio, efficient/large refineries and leading regional marketing positions. Sizeable hydrocarbon resource base albeit with some geographic/ technological concentration; good project execution capabilities; material integration along the oil and gas value chain supported by LNG and/or refining activities and meaningful marketing positions in select group of countries. Moderate hydrocarbon resource base with limited geographic/ technological diversification; moderate project execution capabilities with limited operator responsibilities; some degree of integration along the oil and gas value chain with a small number of mid-sized refineries and a meaningful retail position in a single national market. Small hydrocarbon resource base lacking geographic/ technological diversification; limited project execution capabilities with no meaningful operator responsibilities; limited degree of integration along the oil and gas value chain with interests mainly in subscale refineries and weak marketing position. Very small hydrocarbon resource base concentrated in single region/ technology; weak project execution capabilities with no operator responsibilities; very limited degree of integration along the oil and gas value chain. Very small hydrocarbon resource base concentrated in single region/ technology and largely non-producing assets; very weak project execution capabilities and very limited degree of integration along the oil and gas value chain. Factor 3: Profitability and Returns (10% weight) Why it Matters Profitability and return measures are key both to management and to investors in the petroleum industry, which is fundamentally a commodity business. No single company controls the price for the crude oil and natural gas it sells or, for that matter, the margins on its refined products. To achieve competitive returns, a company has to maintain a lean cost structure and control both its cash operating and capital costs, while optimizing the capital invested. The petroleum industry is also highly capital-intensive, so strong returns are critical to attracting low-cost debt and equity capital. While many of the integrated companies have the cash flow and the financial wherewithal to fund capital spending internally, they frequently need to rely on external debt and equity capital, particularly to finance larger acquisitions and mergers. How We Assess it For The Grid EBIT/Average Book Capitalization: Earnings before interest and taxes (EBIT) /Average Book Capitalization is a consolidated return measure earned on all of a company’s sources of capital. EBIT (the numerator) is measured over a one-year period. Book capitalization (the denominator) includes total debt plus book equity, minority interests and deferred taxes. Book capitalization is an average of the current and prior year to attempt to reflect flow items that change the balance sheet during the year. 10 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Downstream EBIT/Total Throughput Barrels: Downstream EBIT is measured against throughput volume (note: we do not use refining-only EBIT because this is not publicly reported by companies in our rated universe on a consistent basis. Downstream EBIT encompasses contributions from refining and chemicals manufacturing, supply and trading as well as retail and marketing. This however excludes contributions from gas and power businesses). Both numerator and denominator are measured over a one-year period. FACTOR 3 Profitability and Returns (10%) Sub-factor Weight Sub-Factor Aaa EBIT/Average Book Capitalisation 5% ≥25% Downstream EBIT/Total Throughput Barrels ($/bbl) 5% ≥$15 Aa A Baa Ba 20% - 25% 15% - 20% 10% - 15% 5% - 10% $9- $15 $6 - $9 $3 - $6 $2 - $3 B Caa Ca 3% - 5% 0% - 3% <0% $1 - $2 $0 - $1 <$0 Factor 4: Financial Policy (20% Weight) Why it Matters Management and board tolerance for financial risk is a rating determinant as it directly affects debt levels, credit quality, and the risk of adverse changes in financing and capital structure. Our assessment of financial policies includes the perceived tolerance of a company’s governing board and management for financial risk and the future direction for the company’s capital structure. Considerations include a company’s public commitments in this area, its track record for adhering to commitments, and our views on the ability for the company to achieve its targets. Financial risk tolerance serves as a guidepost to investment and capital allocation. An expectation that management will be committed to sustaining an improved credit profile is often necessary to support an upgrade. For example, we may not upgrade a company that has built flexibility within its rating category if we believe the company will use that flexibility to fund investment projects, a strategic acquisition, cash distribution to shareholders, spin-off or other leveraging transactions. Conversely, a company’s credit rating may be better able to withstand a moderate leveraging event if management places a high priority on returning credit metrics to pre-transaction levels and historically has consistently demonstrated the commitment to do so. How We Assess it For The Grid Financial Policy Moody’s assesses the issuer’s desired capital structure or targeted credit profile, history of prior actions and adherence to its commitments. Attention is paid to management’s operating performance and use of cash flow through different phases of investment and commodity cycles. Also of interest is the way in which management responds to key events, such as changes in the credit markets and liquidity environment, legal actions, competitive challenges, and regulatory pressures. Management’s appetite for M&A activity is assessed, with a focus on the type of transactions (i.e. core competency or new business) and funding decisions, including willingness to issue equity or sell assets in the event of large acquisitions. Frequency and materiality of acquisitions and previous financing choices are evaluated. A history of debt-financed or credit-transforming acquisitions will generally result in a lower score for this factor. 11 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES We also consider a company and its owners’ past record of balancing shareholder returns and debt holders’ interests. A track record of favoring shareholder returns at the expense of debt holders is likely to be viewed negatively in scoring this factor. We consider these factors in the context of the inherent volatility of commodity prices and downstream margins affecting operating cash flow generation as well as the relatively high capital intensity of oil and gas activities. Integrated oil and gas companies typically undertake large investments in complex upstream and downstream projects, which are characterized by significant execution risk and long lead times resulting in a large proportion of capital being tied up in non-cash producing assets under construction. FACTOR 4 Financial Policy (20%) SubFactor Financial Policy Subfactor Weight Aaa Aa A Baa Ba B Caa Expected to 20% Expected to have: Expected to have: Expected to Expected to Expected to have: Expected to very stable and have: predictable financial policies have: financial have: financial have: financial extremely financial policies that balance the policies that policies that conservative policies that conservative create elevated interest of favor financial policies; financial policies; that preserve tend to favor very stable metrics; stable metrics; creditor interests. creditors and risk of debt shareholders shareholders public commitment minimal event risk Although modest shareholders; over creditors; over creditors; restructuring in to very strong that would cause a event risk exists, some risk that above average high financial risk varied economic the effect on credit profile over rating transition; debt funded financial risk resulting from environments. leverage is small acquisitions or resulting from public shareholder the long term. commitment to and temporary; distributions, shareholder shareholder strong strong credit distributions distributions, acquisitions or profile over the commitment to a could lead to a acquisitions or other significant solid credit long term. weaker credit other significant capital structure changes. capital structure profile. profile. changes. Ca Expected to have: financial policies that create elevated risk of debt restructuring even in healthy economic environments. Factor 5: Leverage and Coverage (25% Weight) Why it Matters Leverage and coverage measures are indicators of a company’s financial flexibility and long term viability. Financial flexibility is critical to integrated oil and gas companies to be able to undertake large investments in complex upstream and downstream projects, which require the continuing funding of substantial capital commitments through periods of heightened commodity price and downstream margin volatility, as well as entail significant execution risk. The factor is comprised of three sub-factors: Interest Coverage Earnings before interest and taxes (EBIT) /Interest Expense is used to as an indicator for a company’s ability to pay interest and other fixed charges from its operating performance. Cash Flow Retained Cash Flow / Net Debt is an indicator of a company’s ability to repay principal on its outstanding debt. It is a measure or estimate for cash flow generation before working capital movements and after dividends in relation to outstanding debt less cash. 12 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Capital Structure Total Debt to Capital is an indicator for how much of the company’s capital structure is composed of debt and debt like obligations. Some of the financial ratios used in this methodology are presented on a gross debt basis and some others on a net debt basis (i.e. gross debt less cash and cash equivalents). In fact, Moody's takes both measures into consideration. Many of the integrated oil companies carry large cash balances, some arising from free cash generation and managed in tandem capital need and shareholder returns. Other companies, as in Europe, tend to hold considerable liquidity rather than rely on bank lines. In addition, many European companies with large US dollar-denominated assets and revenues prefer to fund in foreign currency to hedge foreign currency exposures, despite having surplus local currency cash. In such cases, Moody’s will also consider net debt. How We Assess It For The Grid » EBIT / Interest Expense: The metric is defined as EBIT divided by interest expense. » RCF / Net Debt: The metric is defined as operations less dividends divided by net debt. » Total Debt /Capitalization: The metric is defined as debt divided by book capitalization (inclusive of minority interest and deferred income taxes). 13 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Factor 5 Leverage and Coverage (25%) Sub-Factor EBIT/Interest Expense RCF/Net Debt Debt/Capitalization Sub-factor Weight Aaa Aa A Baa Ba B Caa Ca 7.5% ≥20x 12x - 20x 7x - 12x 4x - 7x 2x - 4x 1x - 2x 0.5x - 1x <0.5x 10.0% ≥60% 40% - 60% 30% - 40% 20% - 30% 10% - 20% 5% - 10% 2% - 5% <2% 7.5% <25% 25% - 35% 35% - 45% 45% - 55% 55% - 65% 65% - 75% 75% - 85% ≥85% Factor 6: Constraints related to Government’s Policy Goals Why it Matters Oil and natural gas companies are distinctive in the role they play as very large dependable cash flow generators for governments in both low and high commodity price environments. This is particularly true in some emerging countries where a number of oil companies irrespective of whether they are state- or privately-owned are the primary generators of fiscal revenues and hard currency for the governments of the countries in which they are domiciled and hold the bulk of the national hydrocarbon resources. Some of these companies, and in particular the flagship state-owned national oil companies of resource-rich countries, tend to score very highly on most grid factors due to their enormous oil and gas reserves, low geological risk and finding costs, or low financial leverage. However, they are often regarded by their governments as a major source of employment and advancement. They are called upon to play a key role in providing social services or carrying out government social policies and subsidies for key products such as gasoline or heating oil. From a financial standpoint, they are compelled to pay out large portions of their cash flow via royalties, dividends, special taxes, and direct contributions to government development funds. This is often to the detriment of their ability to reinvest internally and preserve their financial flexibility. In many instances, governments do not have any ready alternatives to heavy dependence on the oil and gas sector, since the economy is not sufficiently diversified, or tax collections from the non-oil sector are limited. To capture some of the considerations that arise from the unique role of the petroleum sector in some countries, we include an additional rating factor “Constraints Related to Government’s Policy Goals,” which focuses on the likelihood that a government may take action to the detriment of the company’s credit standing (either in its capacity as main shareholder and/or tax collector) in order to fulfil certain policy objectives. This factor is not weighted, but is applied as a notching down of the grid-indicated outcome generated by Factors 1-5. While all companies are scored under Factor 6, the result is no down notching for a majority of the currently rated companies. However, there is a substantial impact on the grid-indicated rating for stateowned companies that are key sources of funding for government activities and/or which are directed to spend on social policies that do not directly support the company’s business activities. In the first half of 2016, more than half of the rated companies in this sector had no down notching for Factor 6, including some companies that are government owned. Such companies may provide significant royalties, income or petroleum taxes but are not differentially singled out and do not dominate the government’s tax revenues. Their fiscal contributions are limited to royalties, income and certain petroleum taxes, and are subject to an established and transparent fiscal regime that rarely changes and is consistently applied. Their contributions are generally not critical for government revenues, as is the case within a large diversified economy. 14 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES At the other end of the spectrum are national oil companies, which may incur a Factor 6 downward adjustment of as much as four to nine notches. In these cases, the government depends on the state oil company for a large share or almost all of its fiscal revenues to fund its budget and social spending programs. The companies are also called on to advance social programs and services outside the oil sector. How We Assess it For The Grid FACTOR 6 Constraints related to Government’s Policy Goals Sub-Factor Zero to Three Notch Adjustment Constraints related to Government’s Policy Goals » » » » Four to Six Notch Adjustment Government has limited powers to » influence the company’s corporate governance, strategy and financial policies where the state maintains a controlling stake, minority shareholders’ rights are strongly » protected Legal framework and tax regime of the company’s country of domicile are stable and predictable Government policy goals do not » conflict with the pursuit of business and financial objectives primarily focused on shareholder value creation - even though, in the case of a » resource-rich country, government policies seek to ensure that approach to developing national oil and gas resources reflects public interest considerations Significant share of international assets/revenues derived from outside of the country of domicile. Seven to Nine Notch Adjustment Government maintains a controlling » stake in the company and has powers to influence the company’s corporate governance, strategy and financial policies Legal framework and tax regime of the company’s country of domicile are » subject to periodic adjustment giving rise a certain degree of unpredictability » Company and oil & gas sector as a whole materially contribute to government’s tax receipts and country’s export revenues » Government’s primary objective is to promote the development of the country’s oil and gas resources and/or ensure its security of energy supply. Public interest considerations are paramount, even though compatible with maintenance of sound financial standing by company. As 100%- or controlling owner, state has wide powers to influence company’s corporate governance, strategy and financial policies; no effective protection of minority shareholders’ rights Legal framework and tax regime of the company’s country of domicile lack stability and are highly unpredictable Company and oil & gas sector as a whole contribute most of government’s tax receipts and country’s export revenues Primary objective of state-shareholder is to maximize revenues raised from company (and the country’s oil sector at large) in order to fund government’s social policies and boost country’s employment, with little consideration given to company's financial standing. Assumptions and Limitations, and Rating Considerations That Are Not Covered in the Grid The rating methodology grid results from a decision to favor simplicity that enhances transparency and to avoid greater complexity that might enable the grid to map more closely to actual ratings. The five rating factors in the grid do not constitute an exhaustive treatment of all the considerations that are important for ratings of companies in the integrated oil and gas industry. In addition, our ratings incorporate expectations for future performance, while the financial information that is used to illustrate the mapping in the grid in this document is mainly historical. In some cases, our expectations for future performance may be informed by confidential information that we can’t disclose. In other cases, we estimate future results based upon past performance, industry trends, competitor actions or other factors. In either case, predicting the future is subject to the risk of substantial inaccuracy. Assumptions that may cause our forward-looking expectations to be incorrect include unanticipated changes in any of the following factors: the macroeconomic environment and general financial market conditions, industry competition, disruptive technology, regulatory and legal actions. Key rating assumptions that apply in this sector include our view that sovereign credit risk is strongly correlated with that of other domestic issuers, that legal priority of claim affects average recovery on 15 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES different classes of debt sufficiently to generally warrant differences in ratings for different debt classes of the same issuer, and the assumption that access to liquidity is a strong driver of credit risk. In choosing metrics for this rating methodology grid, we did not explicitly include certain important factors that are common to all companies in any industry such as the quality and experience of management, assessments of corporate governance and the quality of financial reporting and information disclosure. The assessment of these factors can be highly subjective and variable over time. Therefore ranking these factors by rating category in a grid would in some cases suggest too much precision in the relative ranking of particular issuers against all other issuers that are rated in various industry sectors. We also did not include certain factors that did not lend themselves to a simple grid presentation. For example, given the predominant concentration of value in exploration and production, we examine fullcycle costs when assessing an integrated oil company’s upstream cost structure and capital efficiency. We calculate or estimate the full-cycle ratio, which links cash operating costs to the ongoing capital invested in replacing reserves, showing the cash margin generated for each dollar invested over a cycle in the finding and development (F&D) effort. Put another way, the full-cycle ratio measures the cash-on-cash return produced by each barrel, or how much cash a company generates in excess of its cost of replacing reserves. The leveraged full-cycle ratio can provide additional insights when analyzed at different points in the industry commodity price cycle. However, grid criteria for the full-cycle ratio would need to be quite complicated to adjust for the large shifts in the cost structure of this industry over time, which are related to the volatility of hydrocarbon prices in addition to other factors. So we have not included the full-cycle ratio in the grid but find it quite useful in comparing a company’s capital efficiency relative to peers over a common period of time. Ratings may include additional factors that are difficult to quantify or that have a meaningful effect in differentiating credit quality only in some cases, but not all. Such factors include regulatory and litigation risk as well as changes in end use demand. While these are important considerations, it is not possible to precisely express these in the rating methodology grid without making the grid excessively complex and significantly less transparent. Ratings may also reflect circumstances in which the weighting of a particular factor will be substantially different from the weighting suggested by the grid. This variation in weighting rating considerations can also apply to factors that we choose not to represent in the grid. For example, liquidity is a consideration frequently critical to ratings and which may not, in other circumstances, have a substantial impact in discriminating between two issuers with a similar credit profile. As an example of the limitations, ratings can be heavily affected by extremely weak liquidity that magnifies default risk. However two identical companies might be rated the same if their only differentiating feature is that one has a good liquidity position while the other has an extremely good liquidity position. 16 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Other Rating Considerations Moody’s considers other factors in addition to those discussed in this report, but in most cases understanding the framework presented herein will enable a good approximation of our view on the credit quality of companies in the global integrated oil and gas industry. Moody’s considers additional factors, including future operating and financial performance that may deviate from historic performance, the quality of management, corporate governance, financial controls, liquidity management, event risk and seasonality. The analysis of these factors remains an integral part of our rating process. Management Strategy The quality of management is an important factor supporting a company’s credit strength. Assessing the execution of business plans over time can be helpful in assessing management’s business strategies, policies and philosophies. In connection with this assessment, we evaluate management performance relative to performance of competitors and our projections. A record of consistency provides Moody’s with insight into management’s likely future performance in stressed situations and can be an indicator of management’s tendency to depart significantly from its stated plans and guidelines. Corporate Governance Among the areas of focus in corporate governance are audit committee financial expertise, the incentives created by executive compensation packages, related party transactions, interactions with outside auditors, and ownership structure. Investment and Acquisition Strategy In our credit assessment we take into consideration management’s investment strategy, as well as the size of the investment required to build new capacity relative to the company existing cash flows. Investment strategy is benchmarked with other companies that have a similar capital intensity in the rated universe to further verify its consistency. Acquisitions can strengthen an integrated oil and gas company’s business. Our assessment of a company’s tolerance for acquisitions at a given rating level takes into consideration management’s risk appetite (including the likelihood of further acquisitions over the medium term) share buy-back activity, the company’s commitment to specific leverage targets, and the volatility of the underlying businesses, as well as that of the business acquired. Ratings can often hold after acquisitions even if leverage temporarily climbs above normally acceptable ranges. However, this depends on the strategic fit, pro-forma capitalization/leverage following an acquisition and our confidence that credit metrics will be restored in a relatively short time frame. Financial Controls Moody’s relies on the accuracy of audited financial statements to assign and monitor ratings. Such accuracy is only possible when companies have sufficient internal controls, including centralized operations and the proper tone at the top and consistency in accounting policies and procedures. Weaknesses in the overall financial reporting processes, financial statement restatements or delays in regulatory filings can be indications of a potential breakdown in internal controls. 17 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Liquidity Management Liquidity is a critical rating factor for all integrated oil companies. Liquidity can be particularly important for non-investment grade companies where issuers typically have less operating and financial flexibility. Moody's forms an opinion on likely near-term liquidity requirements from both a cash source and cash use aspect. We may also examine bank covenants and compliance cushions to assess whether the company is likely to require covenant relief in the event of an industry downturn or an issuer specific decline in performance. Event Risk We also recognize the possibility that an unexpected event could cause a sudden and sharp decline in an issuer's fundamental creditworthiness. Typical special events include mergers and acquisitions, asset sales, spin-offs, capital restructuring programs, litigation and shareholder distributions. 18 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Appendix A: Global Integrated Oil and Gas Methodology Factor Grid Subfactor Weight Aaa Aa A Baa Ba B Caa Ca 140-550 55-140 20-55 10-20 < 10 500-2,000 100-500 30-100 10-30 < 10 1,000-2,000 500-1,000 250-500 50-250 25-50 < 25 Factor 1: Scale (25%) Average Daily Production (Mboe/d) 10% Proved Reserves (Million boe) 10% ≥10,000 5,00010,000 5% ≥ 3,000 2,0003,000 Total Crude Distillation Capacity (Mbbl/d) ≥2,750 1,100-2,750 550-1,100 2,0005,000 Factor 2: Business Position (20%) Business Position 20% Extremely Very large Large and Sizeable Moderate Small Very small Very small large and and diversified hydrocarbon hydrocarbon hydrocarbon hydrocarbon hydrocarbon diversified diversified hydrocarbon resource base resource base resource base resource base resource base hydrocarbon hydrocarbon resource albeit with with limited lacking concentrated in concentrated in resource resource base; strong some geographic/ geographic/ single region/ single region/ base; base; very upstream geographic/ technological technological technology; weak technology and superior strong project technological diversification; diversification; project execution largely nonupstream upstream execution concentration moderate limited project capabilities with producing project project capabilities ; good project project execution no operatorship assets; very execution execution underpinned execution execution capabilities responsibilities; weak project capabilities capabilities by capabilities; capabilities with no very limited execution underpinned underpinned technological material with limited meaningful degree of capabilities and by by leadership; integration operatorship operatorship integration along very limited technologica technological strong along the oil responsibilitiesresponsibilities the oil and gas degree of l leadership; leadership; integration and gas value ; some degree ; limited value chain. integration extensive very strong along the oil chain of integration degree of along the oil integration integration and gas value supported by along the oil integration and gas value along the oil along the oil chain LNG and/or and gas value along the oil chain. and gas and gas value supported by refining chain with a and gas value value chain chain a sizeable activities and small number chain with supported by supported by LNG meaningful of mid-sized interests a global LNG a very large portfolio, marketing refineries and mainly in subportfolio, LNG efficient/larg positions in a meaningful scale refineries highly portfolio, e refineries select group retail position and weak efficient/wor highly and leading of countries. in a single marketing ld-scale efficient/larg regional national position. refineries e refineries marketing market. and leading and leading positions. marketing marketing positions positions in worldwide. several regions. Factor 3: Profitability and Returns (10%) EBIT/Average Book Capitalisation 5% ≥25% 20%-25% 15%-20% 10%-15% 5%-10% 3%-5% 0%-3% < 0% Downstream EBIT/Total Throughput Barrels ($/bbl) 5% ≥ $15 $9 - $15 $6 - $9 $3 - $6 $2 - $3 $1 - $2 $0 - $1 < $0 Factor 4: Financial Policy (20%) Financial Policy 19 OCTOBER 3, 2016 20% Expected to Expected to Expected to Expected to Expected to Expected to Expected to have have have very have have financial have financial have financial financial policies extremely stable and predictable policies that policies that policies that that create conservative conservative financial balance the tend to favor favor elevated risk of financial financial policies that interest of shareholders shareholders debt policies; very policies; preserve creditors and over creditors; over creditors; restructuring in stable stable creditor shareholders; above average high financial Expected to have financial policies that create elevated risk of debt restructuring even in healthy RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Subfactor Weight Aaa Aa A Baa Ba B Caa Ca metrics; metrics; interests. some risk financial risk risk resulting varied economic economic public minimal Although that debt resulting from from environments environments commitment event risk modest funded shareholder shareholder to very that would event risk acquisitions distributions, distributions, strong credit cause a exists, the or acquisitions or acquisitions or profile over rating effect on shareholder other other the long transition; leverage is distributions significant significant term public likely to be could lead to capital capital commitment small and a weaker structure structure to strong temporary; credit profile changes changes credit profile strong over the long commitment term to a solid credit profile Factor 5: Leverage and Coverage (25%) EBIT/Interest Expense Retained Cash Flow/Net Debt Total Debt/Capital 7.5% ≥20x 10.0% ≥ 60% 7.5% <25% 12x-20x 7x-12x 4x-7x 2x-4x 1x-2x 0.5x-1x <0.5x 40%-60% 30%-40% 20%-30% 10%-20% 5%-10% 2%-5% < 2% 25%-35% 35%-45% 45%-55% 55%-65% 65%-75% 75%-85% ≥ 85% Factor 6: Constraints Related to Government's Policy Goals Zero to Three Notch Adjustment Constraints Related to Government's Policy Goals » » » » 20 OCTOBER 3, 2016 Four to Six Notch Adjustment Government has limited powers to » influence the company’s corporate governance, strategy and financial policies - where the state maintains a controlling stake, minority shareholders’ rights are strongly » protected Legal framework and tax regime of the company’s country of domicile are stable and predictable » Government policy goals do not conflict with the pursuit of business and financial objectives primarily focused on shareholder value » creation - even though, in the case of a resource-rich country, government policies seek to ensure that approach to developing national oil and gas resources reflects public interest considerations Significant share of international assets/revenues derived from outside of the country of domicile Government maintains a controlling stake in the company and has powers to influence the company’s corporate governance, strategy and financial policies Legal framework and tax regime of the company’s country of domicile are subject to periodic tweaking giving rise a certain degree of unpredictability Company and oil & gas sector as a whole materially contribute to government’s tax receipts and country’s export revenues Government’s primary objective is to promote the development of the country’s oil and gas resources and/or ensure its security of energy supply. Public interest considerations are paramount, even though compatible with maintenance of sound financial standing by company Seven to Nine Notch Adjustment » » » » As 100%- or controlling owner, state has wide powers to influence company’s corporate governance, strategy and financial policies; no effective protection of minority shareholders’ rights Legal framework and tax regime of the company’s country of domicile lack stability and are highly unpredictable Company and oil & gas sector as a whole contribute most of government’s tax receipts and country’s export revenues Primary objective of stateshareholder is to maximise revenues raised from company (and the country’s oil sector at large) in order to fund government’s social policies and boost country’s employment, with little consideration given to company's financial standing RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Appendix B: Integrated Oil and Gas Industry Overview The integrated oil and gas industry encompasses the full range of activities from exploration for reserves through refining and product marketing. The “upstream,” involves exploration, development and production of oil, natural gas and natural gas liquids. Along the integrated chain, the companies put their oil and gas production through the downstream, which involves refining, distribution, wholesale and retail marketing of refined products, petrochemical manufacturing, and energy marketing and trading. Many of the companies also engage in “midstream” businesses such as natural gas gathering, processing of natural gas liquids, pipeline transportation, and storage. The industry has high barriers to entry in terms of capital, technological and drilling expertise, and required international skills. The major integrated companies are long-established players, and, in an industry characterized by mergers and consolidations over the last two decades, the only significant new players have been national oil companies, who are able to parlay a country’s resources into joint ventures with experienced explorers and developers. The national oil companies have become savvy participants as well as head-to-head competitors in both the upstream and downstream. The oil and gas industry is exposed to commodity price risk. Crude oil and refined products are commodities priced and traded in US dollars on a global basis. Producers and refiners are “price takers” due to conditions of oversupply, lack of OPEC discipline, and industry competition. Consequently, economies of scale and cost competitiveness are critical to profitability. Natural gas, in contrast, is more regionalized in its production (except in liquefied form) and sales patterns and market penetration are limited by pipeline access and physical proximity. The industry is also highly cyclical, following global and regional patterns of economic growth and product demand. In rating companies in this sector, we strive to a significant degree to look through these industry cycles. As a result, at some points in the cycle the ratings of integrated oil companies as a group may have a substantial imbalance above or below their grid-indicated ratings. In general, the upstream operations have the greatest store of value and highest returns, with cash flow and earnings primarily exposed to commodity price swings and a continuing need to re-invest substantial amounts to replace depleting reserves. A company must spend consistently and successfully over a longperiod of time to replace and grow its production base. Otherwise, its reserves and market value will dwindle and the company will eventually liquidate. The downstream is also a capital intensive, high volume and revenue generating business but is a lower return segment, subject to thin margins, volatile price swings on crude inventories, chronic refining overcapacity and competitive pressures that rarely support high prices at the pump for very long. However, as the industry periodically emerges from elevated spending cycles, the downstream can generate sizable cash flows, as was the case in 2006-2008. The retail part of the business includes service stations networks and, increasingly, convenience stores and fast food outlets. Public scrutiny of the downstream is intense on both the pricing and environmental fronts, with refining and marketing the source of most of the industry’s costliest environmental problems. Environmental regulation is also subject to change, and the mandated spending cycles the industry faces are crucial to staying in business but rarely make any capital return. For these reasons, most downstream participants, large and small, have restructured to reduce capital employed or to joint-venture these operations. 21 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Moody’s Related Research The credit ratings assigned in this sector are primarily determined by this credit rating methodology. Certain broad methodological considerations (described in one or more secondary or cross-sector credit rating methodologies) may also be relevant to the determination of credit ratings of issuers and instruments in this sector. Potentially related secondary and cross-sector credit rating methodologies can be found here. For data summarizing the historical robustness and predictive power of credit ratings assigned using this credit rating methodology, see link. Definitions of Moody’s most common ratio terms can be found in “Moody’s Basic Definitions for Credit Statistics, User’s Guide”, accessible via this link. Please refer to Moody’s Rating Symbols & Definitions, which is available here, for further information. To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients 22 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY CORPORATES Report Number: 1038500 » contacts continued from page 1 Analyst Contacts: HONG KONG +852.3551.3077 Chenyi Lu +852.3758.1363 Vice President-Senior Analyst chenyi.lu@moodys.com BEIJING +86.10.6319.6500 Kai Hu +86.10.6319.6560 Vice President-Senior Credit Officer kai.hu@moodys.com SINGAPORE +65.6398.8308 Vikas Halan +65.6398.8337 Vice President-Senior Analyst vikas.halan@moodys.com LONDON +44.20.7772.5454 Author Francois Lauras Production Associate Jobin James © 2016 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. 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However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s Publications. +971.4.401.9536 David Staples +971.4.237.9562 Managing Director – Corporate Finance david.staples@moodys.com To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S. 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(“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a whollyowned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. 23 OCTOBER 3, 2016 RATING METHODOLOGY: GLOBAL INTEGRATED OIL & GAS INDUSTRY