Nov 08 -
-- Russian independent natural gas producer NOVATEK has announced its
intention to buy a 49% equity stake in ZAO Nortgas for $1.375 billion.
-- We forecast that NOVATEK's operating cash flow should remain strong in
2012 and 2013, reflecting increasing gas prices and high oil and condensate
-- We are affirming our 'BBB-' and 'ruAA+' ratings on NOVATEK.
-- The stable outlook reflects our assessment that NOVATEK's credit
metrics will remain commensurate with the current rating, despite the
acquisition and very little headroom relative to our ratio benchmarks.
On Nov. 8, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-'
long-term corporate credit rating and 'ruAA+' Russia national scale rating on
OAO NOVATEK, Russia's largest independent natural gas producer. The outlook is
The rating action reflects our assessment that NOVATEK's credit metrics will
stay within our parameters for the current rating after its $1.375 billion
acquisition of a 49% stake in ZAO Nortgas. This is although at present there
is very little headroom compared with our rating benchmarks.
We believe the acquisition will improve NOVATEK's business through higher
reserves and production. However, we continue to assess the business risk
profile as satisfactory. We also regard the company's continued
diversification into already producing assets as positive. The financial risk
profile remains intermediate.
The acquisition is expected to close in the last quarter of 2012. By year-end
2012, we estimate NOVATEK's ratio of funds from operations (FFO) to debt
(after our adjustments) to fall to about 55%, and adjusted debt to EBITDA to
be about 1.5x, after the acquisition. We view this as a peak in the company's
leverage under the current rating and anticipate that the company will
subsequently reduce debt on the back of robust cash flow generation.
We still forecast NOVATEK's EBITDA in 2012 at about Russian ruble (RUB) 100
billion-RUB105 billion ($3.1 billion-$3.3 billion, assuming an exchange rate
of $1 to RUB32), up from RUB90 billion in 2011, and FFO at about $2.5 billion,
even after the acquisition.
We understand NOVATEK will use equity accounting for its interest in Nortgas.
From our estimates, NOVATEK's debt will likely increase to RUB135
billion-RUB140 billion ($4.2 billion-$4.4 billion) by year-end 2012, including
the acquisition, and credit ratios could be somewhat weaker than our previous
expectations. However, assuming higher production and gas prices, we foresee
adjusted FFO to debt and adjusted debt to EBITDA improving to about 60% and
1.3x, respectively, in 2013. The upward trend in domestic gas prices supports
On the negative side, we still view NOVATEK's financial policies as borderline
aggressive. This reflects the group's large acquisitions in recent years,
which have led to significant debt increases, and a likely substantial
increase in capital spending in the coming years. Although a final decision is
pending, we anticipate that NOVATEK and its partners will construct a
liquefied natural gas (LNG) plant in the Yamal peninsula, estimated to cost at
least $18 billion. Our base-case scenario therefore includes continually high
capital spending, although we understand current capital expenditure
commitments are relatively low.
Another constraint in our view is the group's inherent exposure to country
risk from operating in Russia. Currently, NOVATEK does not export gas, and
domestic gas prices are relatively low, albeit likely to gradually increase.
In our view, profitability and cash flow are nevertheless exposed to volatile
oil and condensate prices, which are linked to international benchmarks and
are not regulated. Sales of oil and condensate attract very low taxation rates
compared with crude oil sales. Consequently, they provide a relatively large
share of NOVATEK's EBITDA (we estimate about 40%), enabling the company to
benefit significantly from currently high international hydrocarbon prices.
Other important country risk factors include uncertainty about future taxes
and regulations, exposure to the volatile U.S. dollar-Russian ruble exchange
rate, a relatively weak domestic banking system, and developments in the
domestic gas market in which state-controlled OAO Gazprom remains the largest
We assess NOVATEK's liquidity as "adequate" under our criteria. We understand
the company will use a bridge loan to help finance the acquisition of Nortgas.
In addition, NOVATEK has recently issued a RUB20 billion bond, the proceeds of
which we understand will partly finance the acquisition.
We think that the group's debt maturities should be manageable. Nevertheless,
we note relatively sizable debt totalling about RUB27 billion and due by
Our assessment of NOVATEK's liquidity profile incorporates our estimates of
the following liquidity sources over the next 12 months:
-- About $4.0 billion-$4.5 billion in cash, including about $300 million
that we assume is tied to the operations;
-- FFO of about $2.5 million;
-- A long-term committed credit facility from Russia-based Sberbank due
in December 2014, of which RUB30 billion is currently undrawn, according to
-- Acquisition financing of about RUB42 billion, toward which the company
has already placed a bond of RUB20 billion and will shortly finalize a RUB30
billion bridge loan.
We estimate liquidity uses over the period at about $4.6 billion, including
the $1.375 acquisition, capital spending, short-term debt, and dividends.
As of June 30, 2012, the group had an ample EBITDA cushion against a
consolidated leverage ratio covenant, reflecting an EBITDA-to-debt ratio of
3x, and EBITDA interest coverage of more than 4x.
The stable outlook reflects our view that NOVATEK will continue to benefit
from increasing production, as well as gradually rising domestic gas prices.
We anticipate that this should enable the group to generate FFO of about $2.5
billion-$2.8 billion in 2012 and 2013, by our estimates, and to bring credit
ratios in line with the rating in 2013. We expect the group will continue to
manage its liquidity.
We could take negative rating actions if the debt-to-EBITDA stayed higher than
1.5x and FFO to debt exceeded 60% at year-end 2013. The rating could also come
under pressure if management in the short term does not secure financing for
the acquisition. Also, given no headroom after the acquisition, further
acquisitions would put additional pressure on the rating. Negative rating
actions could also follow adverse regulatory changes, operational risk related
to Gazprom, an escalation of costs or capital expenditure, or increased
If NOVATEK decides to develop the LNG project in the Yamal peninsula, we
anticipate that it will pass on a large share of the development costs to two
international partners, in line with its guidance. To date, only one partner,
Total S.A. (AA-/Stable/A-1+) has been announced. Ratings upside is unlikely
because of the group's exposure to country risk.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas
Exploration And Production Industry, Jan. 20, 2012
-- Revised Methodology For Oil And Natural Gas Price Assumptions, Nov.
-- Assumptions: Revised Oil Price Assumptions For 2011, 2012, and 2013,
July 22, 2011
Corporate Credit Rating BBB-/Stable/--
Russia National Scale ruAA+/--/--
Senior Unsecured BBB-
Senior Unsecured ruAA+
Novatek Finance Ltd.
Senior Unsecured* BBB-
*Guaranteed by OAO NOVATEK.