BusinessAnd Financial Risks In The Oil And Gas Exploration And Production Industry.doc

Criteria | Corporates | Industrials: Key Credit Factors: Business And Financial Risks In The Oil And Gas Exploration And Production Industry Primary Credit Analyst: Thomas Watters, New York?(1) 212-438-7818;thomas_watters@ Secondary Credit Analyst: David Lundberg, CFA, New York?(1) 212-438-7551;david_lundberg@ Publication date: 10-Nov-08, 11:32:10 EST Reprinted from RatingsDirect Relationship Between Business And Financial Risks Part 1--Business Risk Analysis Part 2--Financial Risk Analysis ??Current Ratings Standard Poors Ratings Services analytic framework for industrial companies in all sectors, including the oil and gas exploration and production (EP) industry, is divided into two major segments: The first part is fundamental business risk analysis. This step forms the basis and provides the industry and business contexts for the second segment of the analysis, an in-depth financial risk analysis of the company. Relationship Between Business And Financial Risks Prior to discussing specific risk factors that we analyze within our methodological framework, it is important to understand how we view the relationship between business and financial risks. Table 1 displays this relationship and its implications for a companys rating. ?Table 1 The following chart summarizes the rating process. ?Chart 1 Part 1--Business Risk Analysis Business risk is analyzed in four categories: country risk, industry risk, competitive position, and profitability. We determine a score for the overall business risk based on the scale shown in table 2. Table 2 Business Risk Measures Description Rating equivalent Excellent AAA/AA Strong A Satisfactory BBB Weak BB Vulnerable B/CCC Analysis of business risk factors is supported by factual data, including statistics, but ultimately involves a fair amount of subjective judgment. Understanding business risk provides a context in which to judge f