TEXT-Fitch affirms LUKOIL at 'BBB-', outlook stable
(The following statement was released by the rating agency)
Dec 21 - Fitch Ratings has affirmed OAO LUKOIL's Long-term foreign currency Issuer Default Ratings (IDR) at 'BBB-'; Outlook Stable. A full list of ratings actions on LUKOIL and Lukoil International Finance BV is at the end of this release.
LUKOIL's ratings reflect the company's strong business profile, both in upstream and downstream, and its solid credit metrics. Fitch believes LUKOIL has sufficient headroom at the current rating level to finance its growth with debt. The agency also recognises the company's efforts in stabilising crude production in Western Siberia and international expansion, mainly in Iraq. OAO LUKOIL is the third-largest integrated oil and gas major operating in Russia, with total hydrocarbon production of 2.1 million barrels of oil equivalent per day (mmboe/d) in 2011 excluding equity affiliates.
- Large Scale Of Operations
LUKOIL's ratings are supported by the company's strong business profile, which factors in its large oil and gas reserves, sizable production (comparable to those of international majors) and low-cost position. In 2011 the company's reserve life remained stable at 22 years, exceeding that of Rosneft ('BBB'/RWN) and TNK-BP ('BBB-'/RWN). The constraining factor for LUKOIL remains its concentration in Russia, which accounted for about 93% of its hydrocarbon output in 2011.
- Oil Output To Stabilise
Fitch recognizes the company's efforts in stabilising its brownfield production, primarily in Western Siberia, which accounted for nearly 56% of LUKOIL's oil production in 2011. In the last-12-months (LTM) ended 30 September 2012 LUKOIL's crude production in Russia decreased by 1%, an improvement compared with a 5% yoy decline in 2011. Fitch expects LUKOIL to stabilise its oil production in Russia over the medium term due to the utilisation of horizontal drilling and hydraulic fracturing on a large scale for brownfield projects, as well as greenfield projects development.
- Expanding International Operations
Fitch views LUKOIL's growing presence abroad, both in upstream and downstream, as a positive rating factor, although new projects come with higher completion risks. LUKOIL has a 75% stake in Iraq's West Qurna-2 oil development project, which the company expects to put on stream by end-2014. LUKOIL's ability to successfully launch new projects in Russia, on the Caspian sea shelf and abroad, on time and within budget would be positive for the rating.
- Strong Downstream Position
LUKOIL's leading downstream position and relatively high refining depth among Russian peers is also rating positive, in Fitch's opinion. LUKOIL owns four refineries in European Russia and four refineries overseas. In 2011, the company refined 1.3 million barrels of oil per day (mmbbl/d), and its Russian refineries accounted for around 18% of total national refinery throughput. From 1 July 2012, all gasoline and most of diesel fuel produced by LUKOIL in Russia comply with Euro-5 standards.
- Ambitious But Flexible Capex
To reverse the production decline, replace reserves and develop new projects, LUKOIL has earmarked substantial investment over 2012-2015 in excess of USD60bn. Fitch believes that the implementation of this intensive capex programme may put some pressure on LUKOIL's ability to generate positive free cash flow (FCF) over the rating horizon, but would expect the company to adjust its capex downwards should oil prices fall.
- Solid Credit Metrics Expected
Fitch views LUKOIL's historically conservative financial policy and strong financial profile as credit-enhancing. Funds from operations (FFO) adjusted leverage remained below 1x and FFO interest coverage exceeded 20x over the past four years. Fitch forecasts that the group's leverage may exceed 1x in 2013-2015 due to the implementation of an ambitious investment programme, if it is debt-funded to a large extent. However, FFO adjusted leverage is likely to remain below 2x and commensurate with investment-grade ratings. FFO interest coverage may deteriorate to 10x by 2015 also triggering no negative rating action. These expectations are based on Fitch's updated Brent price deck of USD100/bbl in 2013, USD92/bbl in 2014 and USD85/bbl in 2015.
RATING SENSITIVITY GUIDANCE
Positive: Stabilisation of crude production in Russia, as well as completion of key upstream projects on time and budget, primarily Caspian shelf and West Qurna-2, while maintaining solid credit metrics, would be positive for the ratings.
Negative: An aggressive investment programme, acquisitions or dividends, resulting in FFO adjusted leverage rising above 2x and FFO interest coverage falling below 10x on a sustained basis, would lead to a negative rating action.
LIQUIDITY AND DEBT STRUCTURE
LUKOIL's liquidity is sound, supported by a cash position of USD2.4bn at end-9M12 and medium-term committed credit lines of USD1.3bn. Its end-9M12 short-term debt and current portion of long-term debt was USD0.8bn. The agency also views LUKOIL's debt maturity profile as well balanced, with 45% of debt falling due after 2016.
FULL LIST OF RATING ACTIONS
Long-Term Foreign Currency IDR: affirmed at 'BBB-'; Outlook Stable
Long-Term Local Currency IDR: affirmed at 'BBB-'; Outlook Stable
Short Term IDR: affirmed at 'F3'
Lukoil International Finance BV
Senior unsecured rating: affirmed at 'BBB-' ( (Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.firstname.lastname@example.org, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.email@example.com))