RPT-Fitch rates Gazprom's LPNs 'BBB(EXP)'
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Oct 14 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Gaz Capital S.A.'s loan participation notes (LPNs) an expected senior unsecured 'BBB(EXP)' rating. The planned notes are the 34th series denominated in SFR to be issued under Gaz Capital's USD40bn debt issuance programme rated 'BBB' by Fitch.
The final rating is contingent upon the receipt of final documentation conforming materially to information already received and details regarding the amount and tenor.
The LPNs are issued on a limited recourse basis for the sole purpose of funding a loan by Gaz Capital to OAO Gazprom (BBB/Stable). Fitch expects the proceeds from the loan to be used for Gazprom's general corporate purposes. The noteholders will rely solely on Gazprom's credit and financial standing for the payment of obligations under the notes.
Gazprom's ratings reflect our expectations that it will continue benefiting from at least stable European gas sales under long-term contracts with gas prices largely linked to that of oil products, until at least the middle of the decade. While we expect pressure to increase the spot component will intensify over time and that Gazprom may soon lose its monopoly on liquefied natural gas (LNG) exports from Russia, we believe that its production scale and conservative debt profile give it enough flexibility maintain strong credit metrics. We also believe that domestic gas market liberalisation in Russia will have a limited positive impact on Gazprom's profits due to lower domestic tariff increases and continuing loss of market share to independent gas producers.
KEY RATING DRIVERS
Strong Operating Profile
Gazprom's ratings reflect its strong operating profile. It accounts for 15% of the world's gas production and meets over a quarter of gas demand in Europe. It benefits from low uplift costs, and high reserve life and replacement rate. We believe that Gazprom's expected sales diversification into China and LNG would enhance its business profile in the long term. Gazprom currently still has an exclusive right to export natural gas from Russia, but its LNG export monopoly is under pressure from independent producers and may soon be lost.
Oil-Linked Prices Remain
We expect that Gazprom will continue benefiting from European gas sales under long-term contracts with prices largely linked to that of oil products until at least the middle of the decade. Currently, only a small percentage of Gazprom's supply contracts have linkage to spot prices, mainly in north west Europe. While we expect continued pressure from European off-takers on pricing due to weaker gas demand, we believe that Gazprom has sufficient flexibility to accommodate some additional concessions to buyers without jeopardising its credit metrics.
European Demand Remains Challenging
In 9M13, Gazprom reported a 14% growth in gas sales to Europe, its principal market by value, and it expects 10% sales volumes growth there in 2013, compared with a 7% drop in 2012, to 140bn cubic meters (bcm). Despite Fitch's expectations of a drop in euro zone GDP of 0.4%, it is likely that Gazprom's gas sales to Europe will outperform our flat 2013 base case. Our 2014 expectation is for a moderate gas sales volume growth, driven by expected euro zone GDP growth of 0.9%.
Domestic Market under Pressure
We believe that the domestic gas market liberalisation in Russia will have a limited positive impact on Gazprom's bottom line due to lower domestic tariff increases and continuing loss of market share to independent gas producers, such as OJSC OC Rosneft (BBB/Rating Watch Negative) and OAO Novatek (BBB-/Stable), both of which have ambitious plans to increase gas production and launch LNG projects in Russia in the second half of the decade. Fitch expects no annual domestic gas price indexation in 2014 and no more than 7%-8% in 2015-2016, compared with 15% annual rises until now. We also expect that Gazprom may soon lose its monopoly on LNG exports from Russia, but will likely keep its monopoly on pipeline gas exports.
Sovereign Caps Standalone Ratings
Fitch rates Gazprom on a standalone basis according to its parent and subsidiary rating linkage. We consider that Gazprom's standalone ratings are in the high 'A' category, limited by country-specific corporate governance issues and its concentration of production in one country. Gazprom's ratings are capped by that of the Russian Federation (BBB/Stable), as the gas supply law stipulates that the state must own at least 50% plus one share in a company that owns the unified gas supply system, i.e., Gazprom. Fitch expects this to remain intact over the medium-term at least.
Large Capex; Negative Free Cash Flow
Gazprom plans to invest around RUB1.2trn annually over 2013-2016. The gas division will receive 75% of this amount, of which almost half is dedicated to pipeline projects. Fitch believes that execution and cost overrun risks of Gazprom's investment programme are mitigated by capex flexibility as the company can delay expansion projects in response to adverse market conditions. We also expect that Gazprom will report negative free cash flows (FCF) until 2016 on our expectations of flat sales volumes and declining gas prices in line with Fitch's updated Brent price deck, which is USD103 per barrel of oil (bbl) in 2013, USD96/bbl in 2014, USD88.5/bbl in 2015 and USD80/bbl thereafter.
Positive: A positive rating action is unlikely at present, given the current level of the sovereign's rating.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Material deterioration of the credit metrics, e.g., funds from operations (FFO) net adjusted leverage above 2.5x and FFO fixed charge cover of below 8x on a sustained basis due to a prolonged decline in oil and gas prices, an aggressive capex programme or sizable acquisitions. Our base case forecast indicates that FFO net adjusted leverage will remain below 1.5x and FFO fixed charge cover above 10x in 2013-2014.
LIQUIDITY AND DEBT STRUCTURE
Fitch views Gazprom's liquidity at 31 March 2013 (latest available IFRS accounts) as solid, with its cash position of RUB573bn more than sufficient to cover its short-term obligations of RUB296bn at the same date. Gazprom also has available credit lines of RUB150bn in total with a five-year maturity from leading Russian banks.
We consider Gazprom's debt maturity structure as comfortable. As a major Russian corporate borrower, it benefits from solid access to debt capital markets. Most of Gazprom's borrowings are in USD or EUR, and we are comfortable that Gazprom has sufficient foreign currency proceeds from export sales to service debt payments.
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