TEXT-S&P Bulletin: Sumitomo Corp. unaffected by U.S. tight oil invt

Thu Aug 2, 2012 5:17am EDT

Aug 02 - Standard & Poor's Ratings Services today said that its ratings on Sumitomo Corp. (A/Stable/A-1) are unaffected by the company's participation in a tight oil development project in the U.S. The Japan-based trading company has announced an agreement with U.S.-based oil and gas development company, Devon Energy Corp. (BBB+/Stable/A-2), to participate in a tight oil development project in Texas. Sumitomo Corp.'s investment will amount to about $2 billion over three years through 2014. That is equivalent to nearly 10% of the company's consolidated capital as of June 30, 2012. As such, this investment will increase concentration risk in Sumitomo Corp.'s investment and loan portfolio. However, in Standard & Poor's view, the balance between Sumitomo Corp.'s risk volume and its profitability and capital will remain commensurate with the current ratings on the company.

Sumitomo Corp. will acquire a 30% stake in the tight oil development project held by Devon Energy. (Tight oil projects involve the extraction of crude oil from shale, limestone, and sandstone formations with low permeability that are classified as source rock, using the same horizontal drilling and hydraulic fracturing technologies used in shale gas development.) Generally, there is potential impairment risk in tight oil development. This is due to downswings in cash flows, which could occur because the price and production volume of crude oil are highly volatile and development costs tend to increase in the development process. Furthermore, drilling of tight oil carries potential environmental risk, as it is a new form of oil field development and its environmental impact is still unknown. Nevertheless, Standard & Poor's believes that the anticipated increase in Sumitomo Corp.'s risk volume will remain manageable in light of its profitability and capital. This is based on our assumption that the total investment amount will not exceed JPY360 billion, which is the planned amount that the company has announced for its new investments and loans for fiscal 2012 (ending March 31, 2013).

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