Dec 06 -
-- We assess Russian oil producer Russneft's business risk profile as
"fair" and financial risk profile as "aggressive".
-- We are assigning our 'B+' corporate credit and 'ruA+' national scale
ratings to Russneft.
-- The positive outlook reflects the possibility for an upgrade if
Russneft continues to generate positive free operating cash flow and improves
its liquidity by addressing covenant issues, extending maturities and by
diversifying its funding sources.
On Dec. 6, 2012, Standard & Poor's Ratings Services assigned its 'B+'
corporate credit rating to Russian exploration and production company OAO NK
Russneft. The outlook is positive. At the same time, an 'ruA+' Russia national
scale rating was assigned.
The rating reflects our assessment Russneft's financial risk profile as
"aggressive" and its business risk profile as "fair".
The rating is constrained by Russneft's relatively high debt level. On June
30, 2012, Russneft's adjusted debt was $5.3 billion, compared with $1.6
billion EBITDA generated on a rolling-12-months basis under a relatively
favorable oil price environment. We view Russneft's liquidity as "less than
adequate" because of tight covenant headroom, sizable maturities in 2013-2014,
and a concentrated funding structure.
The company has maintenance covenants under its debt. Under our standard oil
price scenario of $90/barrel (bbl) for Brent in 2013 and $80/bbl in 2014 and
beyond, those covenants can be breached and annual maturities may exceed the
amount of free cash flow generated. Compared with other rated Russian
companies, Russneft's asset quality is somewhat lower, as the company operates
relatively mature fields with lower economies of scale and its operating costs
are above average in Russia. Like its peers, Russneft is exposed to oil price
fluctuations and faces a heavy tax burden, so that the majority of all-in
costs is effectively set by the government.
These constraints are partly offset by the adequate profitability of
Russneft's upstream operations and by our expectation of positive free cash
flow. Russneft enjoys an imperfect natural hedge because the majority of
Russneft's taxes are linked to the Urals price and the Russian ruble
negatively correlates with the oil price. Russneft's assets are fairly
diversified across Russian oil-producing regions. We understand that capital
spending is relatively modest because Russneft's production growth mainly
comes from efficiency gains, as the company is catching up after the difficult
period of 2008-2009 and does not have any large costly new projects.
The company's financial policy is aimed at deleveraging, as highlighted by the
absence of dividends and by gradual deleveraging in recent years, as
illustrated by Russneft's selling its refining and marketing assets for $0.5
billion to reduce debt in 2011. Still, we see some long-term uncertainty about
how Russneft's shareholding structure and financial policy will evolve in
coming years. Currently, Russneft's shareholders are a Russian company Sistema
JSFC (BB/Stable/--; 49%), CEO and founder Mikhail Gutseriev (49%), and the
Russian state-owned Sberbank (NR; 2%). Significant minority stakes in
operating subsidiaries are held by the international trader Glencore
We expect Russneft to generate about $1.5 billion EBITDA in 2012. Under our
standardized price assumptions of $80/bbl for Brent in the long term, we
expect Russneft's EBITDA to be about $1.1 billion.
We expect Russneft's oil production to grow as the company catches up after
the difficult 2008-2009, when it faced a decline in production on the back of
underinvestment and shareholding uncertainties. After the company's
shareholding structure was settled in 2010, Russneft demonstrated impressive
production growth thanks to efficiency gains, which we expect to continue.
Russneft's credit measures have improved markedly in 2008-2012, and we expect
the positive trend to continue. Under our standard price assumptions, we
expect Russneft to generate positive free operating cash flow (FOCF) of about
$300-500 million and gradually reduce debt. This should translate into funds
from operations (FFO)/adjusted debt of about 15%-20% and adjusted debt/EBITDA
of 3.5x-4.5x, in our view.
We view Russneft's liquidity as "less than adequate". Although the company's
ratio of liquidity sources to liquidity needs is above 1.2x, covenant headroom
is tight and the company is only establishing its standing in the credit
On June 30, 2012, the key sources of liquidity for the next 12 months included
expected FFO of about $1.1 billion. We believe that cash balances ($108
million) were largely tied to operations and hardly available to repay debt.
In addition, the company has some flexibility thanks to a $300 million unused
short-term revolving trade finance facility from Glencore. The key liquidity
needs included $367 million debt amortization in 2012 and about $0.5 billion
in capital spending. In addition, the company faces relatively sizable
maturities of $257 million in 2013 and $364 million in 2014, which we think
bear refinancing risks. Essentially all Russneft's debt comes from only two
lenders, Sberbank and Glencore, and we view reliance on those key lenders as a
Russneft faces tight maintenance covenants under its existing debt facilities.
Under our price scenario, we see the risk of a covenant breach. Our base-case
expectation is that Russneft should be able to obtain a waiver, as it did
before, or refinance.
We believe that Russneft's current efforts to optimize its debt structure and
diversify borrowing sources should be positive for liquidity and possibly
provide for ratings upside potential after they are implemented.
The positive outlook reflects some upside potential for the rating if Russneft
improves its liquidity by addressing potential covenant issues, extending its
maturity profile, and diversifying its funding sources. It also reflects our
expectation that Russneft will continue to generate positive FOCF and use it
for deleveraging. We expect Russneft to refrain from any sizable acquisitions
or dividends, at least as long as its adjusted debt to EBITDA is above 3x.
Under our price scenario, we expect adjusted debt to EBITDA to be about
3.5x-4.5x and FFO to adjusted debt to be about 15%-20%. In case of any shifts
in the shareholding structure, we will evaluate the impact on the company's
Downside pressure could stem from a further increase in liquidity pressures.
Downside pressure could also materialize if the company's leverage increased,
for instance in case of very low oil prices, higher-than-expected capital
expenditures, or in case of any unforeseen acquisitions, which are not part of
our base-case scenario.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- 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.
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Assumptions: Revised Oil Price Assumptions For 2011, 2012, and 2013,
July 22, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
OAO NK RussNeft
Corporate Credit Rating B+/Positive/--
Russia National Scale Rating ruA+