TEXT-S&P may cut OJSC Oil Co. Rosneft long-term issuer credit rtg

Wed Jul 25, 2012 11:04am EDT

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(The following statement was released by the rating agency)

Overview
     -- Russia's state-controlled OJSC Oil Co. Rosneft has announced its 
intention to negotiate the  purchase of a 50% stake in Russian oil company 
TNK-BP International Ltd. from BP PLC. The price is still undecided but, given 
the size of the asset, could be substantial.
     -- We believe that if the transaction proceeds, it could significantly 
weaken Rosneft's financial risk profile.
     -- We are putting our 'BBB-' long-term issuer credit rating on Rosneft on 
CreditWatch with negative implications.
     -- We expect to resolve the CreditWatch placement once we have more 
clarity as to whether the transaction will proceed and, if so, how it will be 
financed.
 
Rating Action
On July 25, 2012, Standard & Poor's Ratings Services placed its 'BBB-' 
long-term issuer credit rating on Russian state-controlled OJSC Oil Co. 
Rosneft on CreditWatch with negative implications.

Rationale
The CreditWatch placement follows an announcement by Rosneft that it intends 
to negotiate the purchase of a 50% stake in Russian oil company TNK-BP 
International Ltd. (BBB-/Stable/A-3) from BP PLC (A/Positive/A-1).

In our view, if the acquisition proceeds, it could significantly weaken 
Rosneft's financial risk profile and, consequently, its stand-alone credit 
profile (SACP), thereby putting pressure on the rating.

We understand that there is no guarantee that the transaction will proceed, 
however. According to Rosneft, TNK-BP's other shareholders have also indicated 
interest in acquiring BP's stake, and BP has an obligation to negotiate with 
them. We note management's firm commitment to maintaining the company's 
investment grade rating. At the same time, we will judge the implications of 
the transaction, should it proceed, on the basis of its eventual financing 
structure.

We currently assess Rosneft's SACP at 'bbb-' on the basis of the company's 
"intermediate" financial risk profile and "satisfactory" business risk 
profile. In addition, we treat Rosneft as a government-related entity (GRE) 
with a "moderately high" likelihood of extraordinary government support. Under 
our methodology, we currently add no rating uplift to Rosneft's SACP because 
the rating on the company is already two notches below the sovereign local 
currency credit rating on the Russian Federation (local currency: 
BBB+/Stable/A-2, foreign currency: BBB/Stable/A-2).

If the transaction proceeds, we may no longer assess the company's financial 
risk profile as "intermediate", which could trigger a downgrade because of the 
potential impact on leverage and liquidity. While the purchase of the proposed 
TNK-BP stake could be positive for the business, Rosneft would remain highly 
exposed to the risks of operating in Russia, which effectively constrain its 
business risk profile at "satisfactory". Ultimately, the impact on Rosneft's 
financials will depend on the amount and maturity of any additional debt 
assumed. There is no clarity about the financing structure at this stage.

Although the price of the prospective TNK-BP stake is still undecided, we 
believe it could be significant given that in 2011, TNK-BP reported $14.3 
billion in EBITDA, produced 2 million barrels of oil equivalent (boe) per day, 
and had reserves of 13.8 billion boe. Although Rosneft's financial metrics are 
currently robust, if the transaction were to proceed and if it were to be 
fully financed with debt, we estimate that funds from operations to adjusted 
debt would fall to slightly more than 30% from 101% in 2011. This is under our 
mid-cycle price scenario of Brent at $100 per barrel (bbl) in 2012, $90 per 
bbl in 2013, and $80 per bbl in the longer term. If Rosneft were to raise 
short-term financing, it would also materially affect liquidity.

BP controls only 50% of TNK-BP, while the other 50% belongs to Russian 
consortium Alfa-Access-Renova. If the transaction were to proceed, and if 
TNK-BP is an equity investee, we believe Rosneft's debt could materially 
increase while funds from operations would increase only by 50% of TNK-BP's 
dividends ($4 billion in 2011, but closer to $2 billion under our mid-cycle 
price assumption of Brent at $80 per bbl).

Our assessment that there is a "moderately high" likelihood of extraordinary 
government support implies that if Rosneft's SACP were to deteriorate by only 
one notch, to 'bb+', we would affirm the rating at 'BBB-' under our 
methodology for GREs. Any signs of political or financial support from the 
government could lead us to raise our assessment of the likelihood of 
government support, which in turn could also support the rating at the current 
level.

The rating on Rosneft continues to be supported by the company's vast 
reserves, large-scale and low-cost production, vertical integration in 
refining, and resilient profitability, thanks to an imperfect natural hedge 
provided by taxation benefits linked to oil from Russia's Urals region. 
Rosneft had robust credit metrics in 2011, with adjusted funds from operations 
to debt of 101%. However, the company is subject to the inherent risks of 
Russia's oil industry, including heavy taxes and uncertainty about future 
changes in the tax regime, given the high interdependence of the Russian oil 
industry and the government's budget. A further key constraint is Rosneft's 
mounting capital expenditures, which, in our view, could turn free operating 
cash flow negative over the next few years.

Liquidity
We currently assess Rosneft's liquidity as "adequate," as defined in our 
criteria. On March 31, 2012, the company's sources of liquidity included:
     -- Cash of Russian ruble (RUB) 113 billion ($3.7 billion) and financial 
assets of RUB119 billion ($3.9 billion);
     -- Substantial credit facilities; and
     -- Substantial cash flow from operations, which we expect to amount to 
$14 billion-$15 billion in the next twelve months in our pricing scenario.

Key uses of liquidity included:
     -- RUB152 billion in short-term debt;
     -- Capital spending, budgeted at more than $15 billion for 2012. We 
believe, however, that this could be lower depending on oil prices and 
exchange rates; and
     -- Dividends of RUB36.6 billion and RUB68 billion in share buybacks.

We believe that Rosneft's GRE status improves its access to international and 
domestic financial markets, which helps offset liquidity risk. Similarly, 
access to financing secured by commodity exports provides further support for 
Rosneft's liquidity. The prospective transaction is very large, however, and 
may reduce the company's liquidity.

CreditWatch 
We expect to resolve the CreditWatch placement once there is more clarity as 
to whether the transaction will proceed and, if so, how it will be financed.

We could downgrade Rosneft if it purchased the TNK-BP stake, depending on the 
amount and maturity of any debt assumed and whether the transaction changes 
our view of the likelihood of government support.

We would likely affirm the rating if the transaction does not proceed.

Related Criteria And Research
     -- Revised Methodology For Oil And Natural Gas Price Assumptions, Nov. 
16, 2011
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 
9, 2010
     -- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- Key Credit Factors: Business And Financial Risks In The Oil And Gas 
Exploration And Production Industry, Nov. 10, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List
Ratings Affirmed; CreditWatch Action
                                        To                 From
OJSC Oil Co. Rosneft
 Corporate Credit Rating                BBB-/Watch Neg/--  BBB-/Stable/--

 (Caryn Trokie, New York Ratings Unit)
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