The company expects continued high prices to support strong operating cash flow, which in turn will underpin stable credit metrics despite significant cost pressures on all major inputs.

"Fitch's energy ratings in the Asia-Pacific region reflect continued high prices being achieved, supporting strong operational cash flow in the upstream sector - and in some cases explicit and implicit support from government owners," said Carolyn Martin, regional head of Fitch's Energy and Utilities team in a 2007 outlook report.

However, Fitch noted in the report issued yesterday from its Brisbane, Australia, and Singapore offices that specific credit challenges existed in some regions and that bondholders would face risks from the upstream sector.

"These risks are expected to stem from higher service and drilling costs, increased M&A [mergers and acquisitions] activity at much higher premiums, increased shareholder-friendly transactions, higher finding and development costs and higher overall cost structures," said Martin. "High prices have mitigated the near-term effect of these concerns; however, a substantial pullback in prices would highlight each of these risks to bondholders."

Strong oil and natural-gas prices continue to be underpinned by the ongoing growth of China and India, both of which have limited domestic oil and natural-gas resources. With the strategic requirement for China and India to secure ongoing sources of oil to feed their energy needs, the national oil companies of both countries have been a significant presence in upstream M&A activity and in bidding for exploration permits. This heightened activity has in turn increased the multiples evidenced in acquisitions and the prices paid for exploration permits across the industry.

While this continued M&A activity at high multiples might normally be a concern to bondholders, continued government support provides some comfort, along with continued strong growth in domestic demand in both territories.