Feb 26 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has placed Alliance Oil Company Ltd's (AOIL) Long-term foreign and local currency Issuer Default Ratings (IDR) of 'B' on Rating Watch Negative (RWN) on the expectation that the acquisition of the company by Alliance Group could significantly affect its financial policies, potentially resulting in a materially worsened credit profile. A full list of rating actions is at the end of this release.
Privately-owned Alliance Group, which held a 45% stake in AOIL, bought out all remaining stock in December 2013, and the company was then de-listed. Alliance Group attracted a USD1.2bn short-term loan to finance the deal, and although Alliance Group's creditors legally have no recourse to AOIL, we believe that Alliance Group may need to change AOIL's financial policies to be able to service the debt. This could include retreating from previously followed zero-dividend practice and/or issuing financial guarantees, which could translate into AOIL's funds from operations (FFO) adjusted leverage falling below the current negative rating action guidance of 5x.
With 9M13 daily hydrocarbon production of 60 thousand barrels of oil equivalent (mbbl/d), AOIL is a Russia-based small integrated oil company, accounting for 0.5% of domestic crude production and 1.5% of oil refining.
KEY RATING DRIVERS
Small Russian Crude Producer
AOIL aims for double-digit growth of oil and gas production in 2014-2015, but even if this growth strategy is successful, its ratings are likely to be limited to the 'B' category, given its limited scale and concentration on Russia. AOIL's upstream production in 9M13 averaged 59.6 mboe/d, up 9% yoy, including natural gas and condensate production of 7.4mboe/d. The company accounts for around 0.5% of crude production in Russia.
Timano-Pechora is Key
AOIL's ability to implement its upstream growth strategy in the Timano-Pechora region is still important for maintaining and increasing its production, although its significance has declined since AOIL launched its gas business in the Tomsk region. At end-2012, Timano-Pechora accounted for 42% of the company's proved oil and gas reserves. The lower-than-expected production potential of Kolvinskoye, AOIL's largest field, launched in September 2011, resulted in upstream production falling to 52.3 thousand barrels per day (mbbl/d) in 4Q12 from 62.4mbbl/d in 4Q11.
More Reliance On Downstream
Progress on the Khabarovsk refinery upgrade aimed at increasing AOIL's primary refining capacity to 100mbbl/d supports AOIL's credit profile. Average daily refining volumes at the Khabarovsk refinery totalled 89.5mbbl/d in 9M13, 13% yoy. The company intends to connect the refinery to Transneft's ESPO oil pipeline in 2014, significantly reducing the company's transport costs. We expect that lower transport costs will largely offset the negative effect from the planned increase of export duty on dark oil products in 2015, and from the expiry of most of AOIL's oil production tax breaks in 2015.
No Deleveraging Expected
At end-2012 AOIL's FFO Fitch-adjusted gross leverage was 3.2x. Under the current financial and dividend policies we expect it to average 3.5x-4.5x in 2013-2018. We consider these figures adequate for the current rating. However, we consider it likely that there will be a change in the company's financial policies stemming from the parent's need to service the acquisition debt. This could translate into AOIL's credit metrics significantly worsening, which is reflected by the RWN.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A change in dividend policies or a more aggressive financial policy, including issuing guarantees in favour of the parent, leading to FFO adjusted leverage rising above 5x on a sustained basis.
- Worsened information transparency following the acquisition by Alliance Group.
- Inability to connect AOIL's refinery to ESPO pipeline by end-2014.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- The RWN could be removed and a Stable Outlook assigned if the company demonstrates its commitment to the current zero-dividend practice and its financial policies remain unchanged, maintaining FFO adjusted leverage consistently at below 5.0x.
LIQUIDITY AND DEBT STRUCTURE
We view AOIL's liquidity position as adequate for the current ratings but challenged overall. Organic sources of liquidity are the most constrained due to high capex resulting in negative free cash flow generation. At 30 September 2013, AOIL had USD276m of cash compared with short-term debt of USD486m. In 2013, AOIL improved its debt maturity profile by issuing a USD500m Eurobond due 2020 and preferred stock for the equivalent of USD100m. The preferred stock was then bought out by Alliance Group.
Alliance Oil Company Ltd.
Long-Term foreign currency IDR: 'B', placed on RWN
Long-Term local currency IDR: 'B', placed on RWN
Short-Term foreign currency IDR: affirmed at 'B'
Short-Term local currency IDR: affirmed at 'B'
Foreign currency senior unsecured rating: 'B'/RR4, placed on RWN
National Long-Term Rating: 'BBB(rus)', placed on RWN
OJSC Alliance Oil Company
Local currency senior unsecured rating: 'B'/RR4, placed on RWN
National senior unsecured rating: 'BBB(rus)', placed on RWN