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April 15 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Alliance Oil Company Ltd.'s (AOIL) USD-denominated guaranteed notes an expected foreign currency senior unsecured rating of 'B(EXP)'/'RR4'. 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 notes will be issued by Alliance Oil Company Ltd., and will be guaranteed by its key upstream operating subsidiaries. According to the terms and conditions of the notes, the issuer will ensure that the guarantors account for at least 75% of AOIL's consolidated net assets or revenues.
AOIL's ratings continue to reflect the company's limited scale of operations, restricted market share, concentrated business model and potential increase in capital intensity and leverage to pursue its growth strategy. Fitch notes that the company's organic growth strategy may be challenged by the recent production decline at the Kolvinskoye field in Timan-Pechora. At the same time, Fitch recognises the company's progress in upgrading the Khabarovsk refinery. AOIL is one of Russia's second-tier integrated oil companies, with main upstream assets in the Timan-Pechora and Volga-Urals regions.
Upstream Scale Limits Upgrade
AOIL's average daily upstream production in 2012 was 53.9 thousand barrels of oil per day (mbbl/d), up 10% yoy. Fitch expects that in 2013 the company may see a moderate decline in crude production. The current production level is commensurate with the mid 'B' rating category. A positive rating action would be possible if the company expands its hydrocarbons production to 80-100 thousand barrels of oil equivalent per day (mboe/d) excluding equity stakes while maintaining credit ratios commensurate with the 'B' rating category. The company also launched the gas business in the Tomsk region in 2013, and targets double digit growth of oil and gas production in 2013-2015.
Timan-Pechora is Key
AOIL's ability to implement its upstream growth strategy at the Timan-Pechora region will be particularly important for maintaining and increasing its production. In 2012 AOIL's average daily oil production in Timan-Pechora amounted to 23mbbl/d (or 42% of overall production), and at end-2012 the region was accountable for 42% of the company's proved oil and gas reserves. Lower than expected production potential of Kolvinskoye, AOIL's largest field launched in September 2011, resulted in upstream production declining to 52.3mbbl/d in Q412 from 62.4mbbl/d in Q411.
Current progress on the Khabarovsk refinery upgrade, increasing AOIL's primary refining capacity to 90mbbl/d, is supportive of the current rating. Average daily refining volumes at the Khabarovsk refinery amounted to 80.1mbbl/d in 2012, up 9% yoy. The company intends to increase its refining capacity further to 100mbbl/d by end-2013, and to connect the refinery to Transneft's ESPO pipeline by end-2013, significantly reducing the company's transportation costs.
Material Contribution to JV
In 2012, AOIL contributed its Volga-Urals production assets operated by Tatnefteotdacha and Saneco to its joint venture (JV) with Spain's Repsol, S.A. ('BBB-'/Negative) set up in 2011. The assets accounted for 35% of AOIL's proved reserves at end-2012, and for around 38% of the company's upstream production in 2012. Fitch expects AOIL will retain significant control over these assets, but estimates that operating cash flow effectively available for servicing AOIL's debt may decrease in the medium term on the back of the transaction. In March 2013, the JV also began commercial natural gas production in Russia, but the volumes are moderate at this stage (855 thousand cubic meters per day, or 5.4mboe/d).
Rising Debt Load
Based on unaudited consolidated financials for 2012, Fitch estimates that the AOIL's funds from operations (FFO) adjusted leverage increased to 3.3x at end-2012 from 2.3x at end-2011, and FFO interest cover decreased to 3.8x in 2012 from 5.9x in 2011. This deterioration is a result of the total debt rising to USD2,171m at end-2012 (including 50% of USD202m preference stock as per Fitch's methodology) from USD1,621m at end-2011 needed to finance the company's capex. Fitch views the company's current debt load as being commensurate with the 'B' rating category level, but notes that inability to deleverage would hold the company's ratings back at the current category.
Increasing the scale of upstream and downstream operations (including hydrocarbon production expanding to 80-100mboe/d), demonstrating a growing proved reserve base, achieving positive free cash flow on a consistent basis, and maintaining mid-cycle FFO adjusted leverage at or less than 4x and interest cover above 4x could lead to a positive rating action.
Decline in hydrocarbon production (eg stemming from inability to stabilise the production at Timan-Pechora), as well as higher capex or non-zero dividends resulting in mid-cycle FFO adjusted leverage rising above 5x and interest cover falling below 3x could lead to a negative rating action.
Fitch views 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 FCF generation. At end-2012, AOIL had USD385m of cash compared with short-term debt of USD402m.
External Sources of Liquidity:
In 2008-2012 AOIL was able to issue long-term ruble domestic bonds, issue Eurobonds, obtain long-term financing from Vnesheconombank ('BBB'/Stable) and issue preferred stock. Fitch believes the company would have the ability to raise additional finance when needed, if its financial position does not deteriorate significantly.
Alliance Oil Company Ltd.
Long-Term foreign currency IDR: 'B'; Outlook Stable
Long-Term local currency IDR: 'B'; Outlook Stable
Short-Term foreign currency IDR: 'B'
Short-Term local currency IDR: 'B'
Foreign currency senior unsecured rating: 'B'/'RR4'
National Long-Term Rating: 'BBB(rus)'; Outlook Stable
OJSC Alliance Oil Company
Local currency senior unsecured rating: 'B'/'RR4'
National senior unsecured rating: 'BBB(rus)'