(The following statement was released by the rating agency)
July 18 -
Summary analysis -- Alliance Oil Co. Ltd. ------------------------- 18-Jul-2012
CREDIT RATING: B+/Stable/-- Country: Russia
Primary SIC: Oil and gas
Mult. CUSIP6: 018760
Credit Rating History:
Local currency Foreign currency
10-Feb-2010 B+/-- B+/--
The ratings on Russia-based crude oil and oil products producer Alliance Oil Co. Ltd. reflect Standard & Poor’s Ratings Services’ view of the company’s “weak” business risk profile and “aggressive” financial risk profile, according to our criteria.
In our view, Alliance Oil’s business risk profile reflects the company’s position as a midsize Russian oil producer and refiner in a cyclical and volatile industry, the substantial capital expenditures needed to develop its oilfields and modernize its downstream assets, and its less favorable product mix compared with that of Russian oil majors.
Compared with other rated Russian oil companies, Alliance is smaller and less diversified. Like other Russian oil companies, Alliance is subject to a very heavy and volatile tax regime and to general country risks, such as a weak domestic financial system.
In addition, we see execution risk related to Alliance Oil’s key investment project, namely, the modernization of its Khabarovsk refinery. We believe that if the refinery’s modernization is postponed, Alliance’s downstream margins will be hit substantially.
However, key rating strengths, in our view, include the company’s vertical integration, and a long reserve life with significant production growth potential, mostly arising from the Kolvinskoe field in the Timano-Pechora region, which we expect to contribute about 50% to the current production when it reaches full capacity. Alliance Oil has adequate profitability in its upstream segment, largely owing to temporary mineral extraction tax exemptions the company currently enjoys for several of its production fields.
Alliance Oil’s financial risk profile is constrained by expected substantial capital expenditures for the rest of 2012. This, in our view, will lead to considerably negative free operating cash flow (FOCF) and further debt increases under our oil-price assumptions. However, Alliance Oil’s financial risk profile is supported by a medium-term maturity profile and significant liquidity reserves in the form of surplus cash and long-term committed lines, the latter of which are available to fund the company’s capital-expenditure program.