TEXT-Fitch affirms Eni SpA at 'A+'; outlook stable
(The following statement was released by the rating agency)
Apr 25 - Fitch Ratings has affirmed Eni SpA's (Eni) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'A+'. The Outlook on the Long-term IDR is Stable. The agency has also withdrawn Eni's Short-term IDR and Eni Finance International SA's commercial paper rating of 'F1'. The short-term ratings withdrawal is due to insufficient information provided.
The affirmation reflects the solid profitability of Eni's exploration & production business supported by high oil prices and the recovery of the Libyan production close to pre-crisis output levels. This offsets weak cash flows reported in Eni's gas marketing business, refining & marketing, and petrochemicals. All these segments were loss-making at the adjusted operating profit level in 2011 and Fitch does not expect any meaningful improvements in their profitability in 2012 and 2013.
Eni has two large asset disposals planned over the rating horizon. These are the mandatory divestiture of Eni's controlling stake in Snam SpA, the regulated gas business in Italy and the sale of Eni's stake in Galp Energia, the Portugal-based integrated oil and gas company. The divestiture of Snam is required by the Italian government by September 2013 according to a recent law. This is part of the government's plan to liberalise the domestic gas market by the unbundling of gas transportation, distribution, regasification and storage activity from Eni.
The disposal of its 53% stake in Snam will lead to a marked improvement in Eni's credit ratios given the high level of debt held at Snam, which is typical for this type of business. However, Fitch does not anticipate any positive rating impact from this disposal, and the improvement to credit ratios is supportive of the Stable Outlook. The deconsolidation of Snam's EUR11.2bn debt from Eni's balance sheet will reduce Eni's net debt by about 40%. Fitch expects FFO-adjusted net leverage to improve by about 0.6x. This is based on the assumption that Eni will receive EUR11.2bn of cash as repayment of shareholder loans granted to Snam, but no cash proceeds from the sale of its equity stake.
Fitch believes that the Snam disposal could weaken Eni's business profile as the company will lose the contribution from a predictable, regulated, utility-type income stream (10% of Eni's total EBITDA in 2011). In addition, the unbundling of gas transportation and liberalisation of the gas market will increase the competitiveness of the Italian gas market, putting pressure on Eni's margins. The agency expects the share of E&P in Eni's cash flow to increase by 2015 due to the deconsolidation of Snam and also increased focus on E&P in the 2012-2015 business plan. This will require a stronger balance sheet to mitigate the high risk nature of E&P. Fitch does not anticipate any immediate negative rating impact from this disposal but notes the potential impact on the company's overall business profile.
Eni's 33% stake in Galp is currently worth about EUR3bn. In March 2012, Eni announced the disposal of a 5% stake in Galp to Amorim Energy, another shareholder of Galp. Fitch does not expect this disposal to have a material effect on Eni's credit profile.
Fitch expects Eni's 2012 results to be negatively affected by the economic recession in Italy as the agency projects Italian GDP contraction to be 1.6% in 2012 following 0.6% growth in 2011. As a result, Eni's domestic businesses are likely to be under intensified pressure from the economic contraction and the impact of austerity measures as well as a high tax burden in 2012. Italy accounted for 31% of Eni's total revenue in 2011, mostly in low margin downstream activities and gas & power.
Eni's ratings are not capped by Italy's ratings ('A-'/Negative) and remain subject to the eurozone 'AAA' ceiling (see "Eurozone Sovereign/Corporate Links - 2012 Update" from 7 March 2012). This is because of Eni's international business exposure with most of its FFO generated outside Italy. Eni is rated on a standalone basis with no direct rating linkage with the Italian state despite the fact that the Italian government owns a 30.3% stake in Eni (3.9% held by Ministry of Economy and Finance and 26.4% by Cassa Depositi e Prestiti).
Eni reported a slight improvement in its financial leverage (defined as FFO-adjusted net leverage) to 2x at YE11 from 2.1x at YE10. Fitch believes the company's leverage is relatively high compared to its European oil and gas peers. However, it is still commensurate with a 'A+' rating, reflecting Eni's adequate business profile as a large international oil and gas company with low production costs supported by predictable income contribution from the regulated gas business (about 10% of total EBITDA).
According to Fitch's projections, Eni's large capex programme of EUR59.6bn for 2012-2015 is likely to result in negative free cash flow (FCF) after dividends. As a result, the rating headroom, which is already low, is likely to decrease in the medium term, if the planned large disposals do not take place.
Negative drivers for Eni's ratings would be persistently negative FCF or large debt-funded acquisitions resulting in a rise in financial leverage (FFO adjusted net leverage above 2.5x). This guideline will be reduced to above 2x after the Snam disposal due to the potential increase in Eni's business risk profile.
Fitch believes that Eni's liquidity policy is less prudent than its European peers. This is because of Eni's high short-term debt in relation to available liquidity and in light of negative FCF after dividends. At end-2011, its EUR6.5bn short-term debt was not fully covered with available liquidity in the form of EUR1.5bn of cash and EUR3.2bn of committed long-term liquidity facilities. Eni also has committed short-term facilities of EUR2.6bn.
As a result of its low liquidity ratio of 0.3x at end-2011 (defined as cash, undrawn long-term committed facilities and free cash flow after dividends versus short-term debt), the company is reliant on continued access to bank lending and the capital markets. Eni's low liquidity ratio is mitigated by its proven access to the bond market and bank debt to date. However, the challenging environment for Italian and European banks may create additional pressure for Eni's liquidity position.
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