(The following statement was released by the rating agency)
Dec 14 -
Summary analysis -- Gazprom Neft JSC ------------------------------ 14-Dec-2012
CREDIT RATING: BBB-/Stable/-- Country: Russia
Primary SIC: OIL AND GAS
Credit Rating History:
Local currency Foreign currency
09-Jan-2008 BBB-/-- BBB-/--
13-Oct-2006 BB+/-- BB+/--
The rating on the Russian vertically integrated oil company JSC Gazprom Neft (Gazprom Neft) is based on Standard & Poor’s Ratings Services’ assessment of the company’s stand-alone credit quality at ‘bbb-'. We assess the business risk profile as “satisfactory” and financial risk as “intermediate.” We also factor in ongoing support from OAO Gazprom (BBB/Stable/A-2), the 96% parent. Given the current level of the stand-alone credit profile, we do not add any uplift for extraordinary parent support because we view the stand-alone credit quality of Gazprom--and therefore its ability to support its subsidiary--similarly at ‘bbb-'.
We focus on parent-subsidiary links rather than extraordinary government support because we believe that Gazprom Neft is a relatively small company in a fully competitive oil sector where the government’s key tool is a much larger state-controlled Oil Company Rosneft OJSC (BBB-/Watch Pos/--). As a result, we think the company is unlikely to enjoy the same level of extraordinary government support as its parent, Gazprom, which is a vertically integrated monopoly and one of the largest companies in Russia.
S&P base-case operating scenario
In 2012, we expect Gazprom Neft to continue expanding its hydrocarbon production year on year thanks to higher gas output, recent and pending acquisitions, and organic growth. As the Russian domestic gas price has been increasing, gas production is now profitable for Gazprom Neft and is expanding, even though we understand there is no preferential treatment by its parent, OAO Gazprom. Recent acquisitions, such as Orenburgneft and a 25.5% stake in Severenergia, are set to contribute to oil and gas production growth. Production growth at the Priobskoye field should help to offset decline at the mature Western Siberian fields, in our view. Gazprom Neft is about to acquire more reserves from its parent essentially at cost, such as Novoport field in Yamal, and is considering some international acquisitions. In the long term, we believe that Gazprom Neft has considerable growth opportunities at greenfield projects, which would become economical if the government approves tax holidays for greenfields.
Because Gazprom Neft’s refining cover is among the highest in the Russian oil industry--meaning that most of its production volumes are refined----we view the company as highly exposed to tax changes, as well as regulatory and pricing developments in the Russian market for refined products. We expect that in 2012-2013, netbacks on refined products should decline because of increasing export duty and excise, and heavy investments will likely be needed to complete refinery modernization to comply with Euro-4 and Euro-5 fuel quality standards which the Russian government plans to mandate. Still, we expect refining to remain a profitable activity in Russia because taxes on product exports remain lower than those on crude and because Gazprom Neft has a solid market share in a number of regions.
S&Ps base-case cash flow and capital structure scenario
We expect Gazprom Neft’s credit metrics to be robust both in the currently favorable oil price environment and under our standardized price assumptions of $100 a barrel (bbl) for the rest of 2012, $90 per bbl in 2013, and $80 per bbl thereafter. In 2012, we expect the ratios of adjusted debt to EBITDA and funds from operations (FFO) to adjusted debt to remain at less than 1x and more than 100%, respectively. Over the longer term, under our standardized price assumption, we expect those ratios to stand at about 1x-1.5x and more than 60%, respectively, and EBITDA to be about $5.5 billion-$6 billion.
We expect capital expenditures to increase considerably to $5.4 billion in 2012 and about $5.7 billion in 2013, compared with $4.0 billion in 2011. The company needs to make heavy investments to support its growth ambitions, offset natural production decline at mature fields, and modernize refineries.
After a series of large acquisitions in 2007-2011, we believe the company is focused on developing newly acquired assets and expect new acquisitions to be modest, such as a potential purchase of green-field projects from its parent and relatively manageable international assets.
We view Gazprom Neft’s liquidity as “adequate,” as our criteria define the term, with the ratio of liquidity sources to liquidity needs exceeding 1.2x over the next 12 months. In addition, we factor in the financial flexibility that Gazprom Neft could benefit from, if needed, as a result of potential liquidity support from the parent and Russian state-owned banks.
As of Sept. 30, 2012, key sources of liquidity included:
-- Cash and short-term financial investments of Russian ruble (RUB) 86.5 billion ($2.8 billion), of which we treat about $250 million as tied to operations;
-- Committed lines of about $650 million;
-- Recently placed RUB10 billion in bonds (about $300 million), and
-- Operating cash flow, which we expect to remain solid in the coming quarters.
Key calls on liquidity included:
-- Short-term debt of about $2.1 billion (excluding prepayment of dividends from equity investees);
-- Capital expenditures of about $4 billion, as we believe that the company has considerable flexibility under its $5.4 billion budget; and
-- Dividends, which we expect to stay at about 20%-25% of net income.
The company currently has comfortable headroom under its covenants, which limit the ratio of debt to EBITDA to 3.0x. This compares with below 1x currently and about 1.0x-1.5x under our projections based on our midcycle oil price assumption.
We believe that Gazprom Neft, as a large Russian oil company and a subsidiary of Gazprom, has relatively good access to funding from local banks, as well as local and international financial markets. This was demonstrated by a successful placement of $1.5 billion of loan participation notes in September 2012 and RUB10 billion of bonds in December 2012. Still, access to refinancing can fluctuate for all emerging market issuers as a result of global macroeconomic uncertainties.
The stable outlook reflects our expectation that Gazprom Neft will be able to stick to its financial policy of keeping the ratio of adjusted debt to EBITDA below 1.5x, corresponding to an adjusted ratio of FFO to debt of more than 60%.
Ratings upside could materialize over the medium term from a broader improvement in Russian oil industry conditions, as well as from the company’s ability to stick to a moderate financial policy and robust credit metrics.
We could lower the rating if large debt-financed acquisitions are not offset by parental support. Even if we lowered the company’s stand-alone credit profile to ‘bb+', however, the rating on Gazprom Neft is likely to remain unchanged because in that situation, we could factor in an additional notch for parent support.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 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. 16, 2011
-- 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
-- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004