Fitch publishes criteria for rating oil and gas exploration and production companies

Fitch applies a two-level approach to assessing upstream companies, capturing both macro- and micro-parameters. The analysis at the macro level is related to industry evaluation, which defines the context for the micro-analysis, or company-specific analysis, which incorporates the assessment of both the business and financial profile of an individual company.

As part of the micro-analysis, the report outlines key operational and financial metrics that Fitch considers when rating independent E and P companies and/or the upstream businesses of integrated oil and gas companies.

Fitch places significant emphasis on operating performance. Due to the unique characteristics of upstream businesses, E&P companies need to be constantly involved in exploration and development to replace reserves or their business will shrink over time. Thus, the report identifies certain beneficial characteristics for E&P companies, including reserves and production size and diversity of operations.

At the same time, the report emphasises the analysis of E and P companies' ability to manage finding and development costs, production and lifting costs as well as reserve replacement and life.

As with all corporates, the financial analysis of an E&P company is focused on the company's ability to generate cash flow, which is essential for repaying debt and financing operations. Stability of cash flow is especially important for upstream companies, whose earnings are exposed to volatile oil and gas prices, and in this context analysis of liquidity risk is also important.

The criteria report formalises Fitch's current best practice and therefore no rating actions are expected to result from its publication.