Fitch Upgrades South Oil LLP to 'BB+(kaz)'; Outlook Stable
October 16, 2012 Fitch Ratings
Fitch Ratings-London/Moscow-16 October 2012: Fitch Ratings has upgraded Kazakhstan-based South Oil LLP's (South Oil) National Long-term rating and National senior unsecured rating to 'BB+(kaz)' from 'BB(kaz)'. The Outlook is Stable.
The upgrade reflects the agency's comfort in South Oil's ability to implement its production expansion programme while maintaining a strong financial profile. Since 2007, its crude production has increased from 4.9 thousand barrels of oil per day (mbbl/day) to 14mbbl/day in 2011, or by CAGR of 30%. Oil output further increased to 15mbbl/day in the LTM ended 31 June 2012. South Oil continues to be focused on increasing its oil production, e.g., it plans to spend over 80% of its KZT57bn capex budget in 2012-2015 on exploration and production drilling to increase oil output. The agency believes that the execution risks of South Oil's strategy are well mitigated by its track record of year-on-year production growth.
South Oil's ratings are constrained by its relatively limited scale of operations compared to Fitch-rated exploration and production companies. Its proved reserves were only 40.8m barrels of oil equivalent (mmboe) at end-2011 and crude production from its three oilfields reached 14 mbbl/d, a 25% increase yoy, in 2011. In its rating case, Fitch assumes that the company will post annual production growth of 10% yoy over the medium term.
The company's operational profile compares well with those of similarly rated international peers. In 2011, the company reported a reserve replacement rate of 152%, a solid but reduced reserves life of 7.6 years, and manageable production costs of USD12/bbl, up 50% yoy. Its finding and development (F&D) costs nearly doubled in 2011 to USD23.5/bbl, reflecting rising fuel costs and intensified drilling operations. Fitch believes that South Oil's F&D and production costs should stabilise in the medium term given that the company has entered a steady growth phase.
The ratings also reflect the company's solid financial performance. In 2011, its funds from operations (FFO) adjusted leverage amounted to 0.5x and FFO interest coverage was at 28.7x, which compare well with those of similarly rated oil and gas peers. Using its updated oil price deck, Fitch forecasts that South Oil will maintain leverage ratios below 1x and double-digit coverage ratios over the medium term. Fitch also forecasts that the company's large F&D costs to expand upstream operations will be covered by its cash from operations (CFO) and not from additional borrowings.
At the same time, Fitch remains concerned about South Oil's low liquidity - low cash balances and a large portion of short-term secured loans in its credit portfolio. Short-term debt accounted for 76% of total debt at end-H112. The company's cash position of KZT1.2bn at end-H112 was insufficient to cover its short-term maturities of KZT10.2bn. Fitch believes that the company will refinance its debt portfolio in 2013-2014.
WHAT COULD TRIGGER A RATING ACTION?
Additional positive rating action is unlikely at this time.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Larger scale of South Oil's operations, e.g., more diversified production base that would lower the company's dependence on a few fields, whilst maintaining a strong credit profile
- An improvement in South Oil's liquidity, e.g. due to extension of its debt maturity profile, would be positive for its rating
- Improved corporate governance
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Failure to implement the planned growth strategy, aggressive capex and/or shareholder-friendly actions resulting in a material deterioration of the company's credit profile would be negative for the ratings.
Company — South Oil
Full nameSouth Oil
IndustryOil and gas