Wed Nov 13, 2013 5:41am EST
Nov 13 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned GPN Capital S.A.'s upcoming USD-denominated Series 3 loan participation notes (LPNs) an expected foreign currency senior unsecured 'BBB(EXP)' rating. The final rating is contingent upon final documents conforming to information already received. A full list of JSC Gazprom Neft's (GPN; BBB/Stable) and GPN Capital S.A.'s ratings is below.
The LPNs will be issued on a limited recourse basis for the sole purpose of funding a loan by GPN Capital S.A. to GPN. The notes will be issued under GPN's USD10bn LPN programme. GPN Capital S.A. is a special purpose financing vehicle of GPN, but is not directly or indirectly a subsidiary. Fitch expects that GPN will mainly use the issue to refinance its debt portfolio and finance its upstream capex.
GPN is Russia's fourth-largest oil producer owned by state-controlled OAO Gazprom (BBB/Stable). In 2012 the company's hydrocarbon production (excluding joint ventures) amounted to 810,000 barrels of oil equivalent per day (mboe/d), of which 82% was liquids.
KEY RATING DRIVERS
Standalone 'BBB' Profile
We rate GPN on a standalone basis. Its 'BBB' rating takes into account the company's internal strengths and a two-notch discount for higher corporate governance and country risks typical for Russian corporates. We assess the ties between GPN and Gazprom, its immediate parent, as strong, mainly because GPN is subject to cross-default provisions in Gazprom's eurobond documentation. This could support GPN's rating, should its standalone profile deteriorate.
Medium Scale Upstream
In 2012 GPN's hydrocarbon production amounted to 810mboe/d (excluding JVs), which Fitch classifies as 'medium' in scale and which places the company between Russia's largest oil producers, such as OJSC OC Rosneft (BBB-/Stable) and OAO LUKOIL (BBB/Stable), on the one hand, and regional smaller producers, such as OAO Tatneft (BB+/Stable) and Joint Stock Oil Company Bashneft (BB/Positive), on the other. Globally, GPN's production level is close to that of peers such as Occidental Petroleum Corp. (A/Stable) and Apache Corporation (BBB+/Stable). The company also has stakes in a number of JVs, including most notably Slavneft and Tomskneft, which added 389mboe/d, or 50%, to its 2012 output, taking total hydrocarbon production to 1,199mboe/d.
Focus on Russian Oil
GPN's operations are concentrated on Russia, where the company now accounts for 6% of crude production (excluding JVs) - mainly in the Yamalo-Nenets and Khanti-Mansiysk regions in Western Siberia. In 2012 its operational metrics remained favourable. The company's reserve life was comfortable at 18 years and the share of proved developed reserves stayed at 54%, close to the 60%-80% range assessed by Fitch as appropriate for higher-rated oil and gas companies.
GPN's production costs of USD5.7/bbl are competitive and close to those of LUKOIL. The reserve base is moderately diversified, with falling production at highly depleted fields in Yamalo-Nenets (42% of total production without JVs) offset by rising output in Khanti-Mansiysk (44%) and Orenburg (3%). We believe this trend will continue in the medium term and hence assume GPN's production will remain flat. This assumption received initial confirmation in 9M13, when GPN's crude production edged up by 1% yoy (excluding JVs).
Ambitious Upstream Target
GPN has an ambitious target of increasing its total hydrocarbon production (including JVs) to 2,000mboe/d by 2020, or by 67% compared with 2012 output. In order to achieve this GPN will need to intensify its greenfield capex programme, which will have a moderately negative impact on its medium-term leverage. The largest projects currently developed by GPN include the Novoport field in Yamal (commercial production scheduled for 2016-2019; peak at 265mbbl/d), the Orenburg assets (peak annual production planned to reach 160mbbl/d compared with 22mbbl/d in 2012) and the Prirazlomnoye offshore field, the license for which the company expects will be transferred from Gazprom in 2013 (peak at above 100mbbl/d by 2020).
The company is also involved in several JV projects (the largest of which are the Messoyakha field developed together with Rosneft and SeverEnergiya). The immediate upside from these projects with respect to the company's debt service ability may be limited, as GPN will have to coordinate the dividend policy of the JVs with its partners.
Solid Downstream Business
GPN's downstream business is well balanced with its upstream segment. The company owns two refineries in Russia, in Omsk and Moscow, with 2012 throughput of 632 thousand barrels of oil per day (mbbl/d), two small refineries in Serbia, and also holds a 50% stake in Russia's Yaroslavl refinery and a minority stake in the Mozyr refinery in Belorus. GPN also operates around 1,650 retail filling stations and is involved in aviation fuelling and bunkering business. In 2012 the downstream segment accounted for around 45% of the company's EBITDA, and we expect it to remain profitable as oil refining in Russia is favoured in the existing tax regime.
Strong Ties With Gazprom
GPN's ties with Gazprom remain strong. The company enjoys operational autonomy and management overlap is limited. However, from strategic and legal perspectives, the companies are closely related. According to the parent's oil strategy, all Gazprom's oil assets are to be consolidated under GPN's umbrella and this process is almost complete. GPN is classified as Gazprom's principal subsidiary under the latter's eurobond terms and conditions. However, Fitch does not currently factor this in GPN's rating, and instead rates the company based on its standalone profile.
Leverage to Edge Up
We expect GPN's on-balance sheet debt to increase in the next one to three years as it pursues its ambitious upstream development strategy but to remain moderate in the medium term. At end-2012 the company's net funds from operations (FFO) adjusted leverage was 0.6x, and based on Fitch's Brent price deck assumptions of USD103/bbl in 2013, USD96/bbl in 2014, USD88.5/bbl in 2015 and USD80/bbl in the long term, we expect it to average 1.5x in 2013-2017. FFO interest coverage amounted to 22x in 2012 and we expect it to average 13x over the same period.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- A positive rating action on Russia and Gazprom even if GPN's standalone profile remains unchanged. This is due to strong ties between GPN and its parent, but the upgrade would not be automatic.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A negative rating action on Russia, as the ratings of Russian oil and gas corporates are capped by that of Russia.
- GPN's aggressive investment programme, acquisitions or dividends, resulting in FFO net adjusted leverage exceeding 2.5x and FFO interest coverage falling below 10x on a sustained basis, which would lead to a reassessment of GPN's standalone credit profile.
- Falling crude production which could also result in a reassessment of GPN's standalone credit profile.
- Material change in parent-subsidiary linkages and a weaker standalone profile.
LIQUIDITY AND DEBT STRUCTURE
At 30 September 2013 GPN's short term debt amounted to RUB47bn and was fully covered by a cash balance of RUB70bn.
GPN's debt portfolio is well balanced by instruments and currencies. The company has ready access to domestic and international debt markets, mitigating any refinancing risk that may result from around half of GPN's debt being due within three years. At 30 September 2013 two-thirds of its debt was denominated in US dollars and euros, and one-third in roubles. The debt was predominantly raised at the level of GPN, and the share of secured debt was only around 15% - hence there are no subordination issues.
LIST OF RATINGS
JSC Gazprom Neft
Long-term foreign and local currency IDRs: 'BBB'; Outlook Stable
National Long-term rating: 'AA+(rus)'; Outlook Stable
Short-term foreign currency IDR: 'F3'
Senior unsecured rating: 'BBB'
GPN Capital S.A.
Senior unsecured rating: 'BBB'
Upcoming Series 3 LPNs: 'BBB(EXP)'
A Full Rating Report on Gazprom Neft dated November 2013 is available at www.fitchratings.com.
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