Moody's Interfax assigns Aa3.ru NSR to RussNeft
December 7, 2012 Moody's Investors Service
Moscow, December 06, 2012 -- Moody's Interfax has today assigned a national scale rating (NSR) of Aa3.ru to RussNeft, an oil and gas exploration and production company in Russia. This is the first time that Moody's Interfax has assigned ratings to RussNeft.
The rating action is based on RussNeft's audited financials under International Accounting Standards for 2011, 2010 and 2009, and information provided by the company's management.
Please see ratings tab on the issuer/entity page on moodys.com for information on Global Scale Rating.
The Aa3.ru rating assigned to RussNeft reflects (1) the considerable size of the company's reserves and scale of operations by global standards, mapping to the Baa rating factor on Moody's global scale; (2) the company's demonstrated track record of improving operating efficiency and reserves management over the past three years; and (3) its conservative financial policies and deleveraging strategy.
However, Moody's also notes RussNeft's (1) complex organisational structure, whereby significant minority interests (up to 49%) at the key operating subsidiaries are held by the company's strategic partner Glencore International AG (Baa2 stable), which also benefits from exclusive offtake rights on RussNeft's oil exports; (2) semi-permanent shareholder structure, which is likely to undergo further changes in the medium term; (3) geographically dispersed reserves base, consisting of relatively modest deposits and requiring efficient logistics arrangements; and (4) weaker financial positioning in the Ba global scale rating category on the compared with its Russian oil and gas sector peers, primarily due to higher-than-sector-average leverage, measured by debt/EBITDA, of 1.0-1.5x (RussNeft's leverage as adjusted by Moody's was at 3.34x as of year-end 2011). RussNeft's total debt of more than $5.0 billion as at year-end 2011 exerts pressure on the company's interest coverage metrics, and debt covenants constrain its financial and operating flexibility and limit investment opportunities.
However, Moody's notes that RussNeft's current debt capital structure stems from its history of ownership changes in the period 2002-10 and does not reflect its previous operating inefficiencies and/or imprudent financial policies. The financing arrangements between the company's major creditors -- Glencore and Russia's largest state-owned bank Sberbank (A3 stable) are long-term and provide for a comfortable debt service schedule without refinancing peaks.
Provided that global oil prices remain at the levels currently anticipated by Moody's (the rating agency currently expects that the Brent crude will be priced at an average of $100 per barrel in 2013, $95 per barrel in 2014, and $90 per barrel in the medium term, beyond 2014), Moody's believes that RussNeft will be able to cover its operating, investment and financing needs through internally generated cash flows. RussNeft does not have any large committed investment projects, and would therefore be able to significantly curtail its capex programme to support debt service, in the event of any significant deterioration in global oil prices.
Moody's also notes, that third-party senior unsecured debt, if raised by the company, would be assessed by the agency for its relative positioning within the company's capital structure and potential subordination, given the existence of substantial minority interests at the key operating subsidiary levels.
Moody's says the stable outlook on the global scale ratings assumes that RussNeft will maintain (1) its conservative financial policy and leverage, measured by debt/EBITDA, not exceeding 3.5x on a sustainable basis; and (2) its retained cash flow (RCF)/net debt above 15%-20%. The ratings do not take into account the possibility of debt-financed bolt-on acquisitions, which Moody's would assess separately for their effect on the ratings.
WHAT COULD CHANGE THE RATING UP/DOWN
RussNeft's ratings are adequately positioned in the current rating category. Upward pressure would be exerted on the ratings if the company (1) reduces its leverage to below 2.0x debt/EBITDA; and (2) sustainably maintains cash flow coverage, measured by RCF/debt, above 35%. Conversely, downward pressure would be exerted on the ratings should there be negative migration of the metrics as a result of internal inefficiencies and/or unfavourable market conditions, or due to any developments that negatively affect current creditor/shareholder arrangements and financial policies.
The principal methodology used in rating RussNeft was the Global Independent Exploration and Production Industry Methodology published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".ru" for Russia. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".
ABOUT MOODY'S AND MOODY'S INTERFAX
Moody's Interfax Rating Agency (MIRA) specializes in credit risk analysis in Russia. MIRA is a joint-venture between Moody's Investors Service, a leading provider of credit ratings, research and analysis covering debt instruments and securities in the global capital markets, and the Interfax Information Services Group. Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE: MCO).
Headquartered in Moscow, RussNeft is one of Russia's largest oil and gas exploration and production companies, with proven and probable oil and gas reserves of more than 1,751.2 billion barrels of oil equivalent as per PRMS- SPE classification, and production of 13.6 million tonnes of oil in 2011. Russneft is 49% is owned by its founder Mr. Mikhail Gutseriev, 49% by Sistema Joint Stock Financial Corporation (Ba3 stable), and 2% by Sberbank of Russia via its subsidiary Sberbank Capital. In the FY2011 Russneft reported $5.6 billion in revenue and $1.68 billion in EBITDA under audited International Accounting Standards.
Company — Russneft
Full nameOAO NK «RussNeft»
IndustryOil and gas