Fitch Revises YATEC's Outlook to Stable; Affirms at 'B-'
July 17, 2013 Fitch Ratings
Fitch Ratings has revised the Outlook on Russia's OJSC Yakutsk Fuel and Energy Company (YATEC) Long-term foreign and local currency Issuer Default Ratings (IDRs) and National Long-term Rating to Stable from Positive and affirmed them at 'B-' and 'BB+(rus), respectively. Fitch has also affirmed the Short-term foreign currency IDR at 'B'.
YATEC is a small natural gas and gas condensate producer and refinery located in the Republic of Sakha (Yakutia) (BBB-/Stable). YATEC's ratings reflect its dominant market position in Yakutia and downstream integration, as well as high adjusted leverage driven mainly by off-balance sheet obligations. We revised the Outlook to Stable from Positive as YATEC failed to reduce the amount of guarantees given to related parties compared with end-2011 levels.
KEY RATING DRIVERS
Dominant Regional Gas Producer
YATEC is the largest natural gas producer in Yakutia with 2012 output of 1.7 billion cubic meters (bcm), accounting for 86% of the republic's total. The regional gas distribution network is isolated from OAO Gazprom's (BBB/Stable) gas pipelines, which secures YATEC's market position but also limits its customer base and production levels.
Small Size Caps Ratings
YATEC's production and reserves are small according to Fitch's criteria, thus limiting its ratings to the 'B' category. In 2012, the company's total hydrocarbon production reached 30.3 thousand barrels of oil equivalent per day (mboepd), lower than that of Afren plc (B+/Stable) with 43 mboepd or Alliance Oil Company Ltd (B/Stable) with 54 mboepd. Since 2007, YATEC's total production has increased by a CAGR of 4%, and we expect its output to remain relatively stable over the medium term.
Outlook Revised to Stable
In 2012, YATEC continued to provide substantial financial and performance guarantees to related parties and had other material related party transactions. Thus, YATEC failed to substantially reduce outstanding related party guarantees, which was a pre-requisite for the Positive Outlook last year.
Gazprom Expansion Potentially Positive
Gazprom's strategy to develop gas fields in Central Siberia including Yakutia has no immediate ratings impact for YATEC, but may be positive in the long run. Gazprom plans to develop and launch Yakutia's Chayanda gas field by 2017 to supply Yakutia-Khabarovsk-Vladivostok 'Power of Siberia' gas pipeline. Should the regional gas network become connected to the Gazprom's pipeline, YATEC might be able to significantly expand its gas production. However, we do not include this scenario in our rating case.
Low Upstream Price Risk
We assess YATEC's upstream price risk as low compared with its oil-producing peers. Russian government continues to liberalise domestic gas markets by gradually increasing gas prices to achieve export netback parity, and YATEC's regulated gas tariffs follow this trend. From 1 July 2013, YATEC's gas tariff increased by 9% to RUB1,758 per thousand cubic meters, and we expect it to increase at least in line with inflation over the medium term.
Downstream Benefits EBITDA
YATEC's profile benefits from its downstream integration, which diversifies its customer base and geography of sales, and adds about one-third of its EBITDA. We expect downstream profits to increase on the back of the company's upgrade of its refining facilities.
High Adjusted Leverage
At end-2012, YATEC's funds from operations (FFO) gross adjusted leverage including off-balance sheet guarantees reached 8x. Although in H113 YATEC called off some related party guarantees, we expect FFO gross adjusted leverage to stay at or above 5x at least until 2016. We view high leverage as a significant burden for the company, which compares unfavourably with other Fitch-rated oil and gas peers in the region on debt metrics. We forecast that YATEC's unadjusted leverage (ie, without off-balance sheet obligations) will fluctuate between 2x-3x in 2013-2016, which is commensurate with mid- or high-'B' rating category.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- No significant new financial and performance guarantees, with a subsequent reduction of FFO gross adjusted leverage to below 4x on a sustained basis, as well as no material related party transactions would be positive for the ratings.
- Successful downstream expansion and quality improvements resulting in a higher contribution to EBITDA and cash flows could also be positive for the ratings.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- We could take a negative rating action if YATEC continues to provide significant guarantees to related parties, leading to FFO gross adjusted leverage of above 6x on a sustained basis.
- YATEC's inability to refinance its RUB3bn bond in 2013 would trigger a negative rating action.
DEBT AND LIQUIDITY
Improving Liquidity, Maturity
At end-2012, YATEC's RUB4.1bn balance-sheet debt was all short term, including a RUB3bn domestic bond with a put option in 2013, compared with only RUB700m in cash. The company has since repaid all bank loans and intends to replace the RUB3bn bond with a long-term loan, which should improve its liquidity position.
Company — YATEK
Full nameYakutsk Fuel and Energy Company OJSC
IndustryOil and gas