Fitch Ratings has maintained TNK-BP International Ltd.'s (TNK-BP) 'BBB-' Long-term foreign and local currency Issuer Default Ratings (IDR) and 'F3' Short-term foreign currency IDR on Rating Watch Negative (RWN). Fitch has simultaneously maintained TNK-BP Finance's 'BBB-' senior unsecured rating and 'F3'Short-term rating on RWN. Fitch is reviewing these ratings as part of its annual rating review process.
Fitch placed TNK-BP on RWN in October 2012 following the announcement of the likely acquisition by OJSC OC Rosneft ('BBB'/RWN) of a 100% interest in TNK-BP.
The rating action indicates that while Fitch does not currently anticipate a downgrade to TNK-BP's rating, many uncertainties remain about the structure, funding and execution of the transaction, the financial profile of an enlarged group and TNK-BP's bondholders' rights. The agency considers that in the short term, the downside risk outweighs upside potential, although Fitch recognises the transaction could improve TNK-BP's credit profile in the long term.
The agency expects to resolve the RWN as the details of the transaction become clearer, probably in the next five months.
TNK-BP is the third-largest oil and gas producer in Russia with daily output of 1.813m barrels of oil equivalent per day (mboed) in 9M2012, excluding equity stakes in OJSC NGK Slavneft and Venezuelan JVs, representing a 2.4% year-on-year increase due to production growth from Uvat and Verkhnechonskoye (VCNG) greenfields. Greenfields accounted for 18% of the total liquid output in 9M12. The company's demonstrated ability to implement key projects in a timely fashion and the increasing share of greenfield production over time is beneficial to its business profile.
As part of its long-term strategy to increase the share of gas to over 20% of production and EBITDA, TNK-BP is developing gas assets in Russia, in particular Rospan, which are at an early stage of development. Fitch expects that the share of gas in the company's total hydrocarbon production will not increase materially until 2015. In addition to gas processing, TNK-BP is actively working on the utilisation of its associated gas at power plants, both captive and commercial, in the regions of its operations. In the medium to long term, TNK-BP should benefit from the government's plan to liberalise the price of natural gas sold on the Russian domestic market by 2014. Fitch anticipates domestic gas prices in Russia to increase by 15% per annum from 2012 to 2014.
Fitch also expects that TNK-BP's EBITDA will remain in the range of USD10bn to USD13bn in 2012-2016, applying the agency's updated oil price deck (USD105 per bbl in 2012, USD90 in 2013, USD82.5 in 2014 and USD70 thereafter), as compared to EBITDA of USD13.3bn at LTM-Q312. This is comparable to equally rated peers operating in the Russian oil and gas industry. Fitch expects that EBITDA per boe will gradually decrease to just above USD15 from USD22 during the same period under Fitch's conservative oil price assumptions.
Fitch estimates that TNK-BP will maintain key mid-cycle credit ratios, such as funds from operations (FFO) adjusted net leverage below 1.5x and an FFO interest coverage ratio above 10x, which is commensurate with the current ratings.
In 2011 TNK-BP reported record cash flows from operations of USD10.5bn, but due to record USD7.9bn dividends it had negative free cash flow (FCF). Fitch expects FCF to remain positive in 2012 due to strong operating performance and cash flows from operations, but acknowledges that a high level of dividend payments may prolong the negative FCF situation. Furthermore, TNK-BP needs to repay USD1.3bn of bank and bond debt in 2013 and had USD3.5bn in cash and cash equivalents at end-Q312. Liquidity is also supported by USD440m undrawn committed lines as of end Q312.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- Plans for the structure, funding and execution of the transaction, the financial profile of an enlarged group and TNK-BP's bondholders' rights therein which do not materially weaken the position of TNK-BP's bondholders compared with their current credit profile could lead to the removal of the RWN. Fitch will particularly take into account the rating of the enlarged group, parent/subsidiary relationships, and structural features.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Plans for the structure, funding and execution of the transaction, the financial profile of an enlarged group and TNK-BP's bondholders' rights therein which materially weaken the position of TNK-BP's bondholders compared with their current credit profile could lead to a downgrade. Fitch will particularly take into account the rating of the enlarged group, parent/subsidiary relationships, and structural features.