(The following statement was released by the rating agency)
July 25 - Fitch Ratings has assigned Russia-based OJSC Yakutsk Fuel and Energy Company (YATEC) 'B-' Long-term foreign and local currency Issuer Default Ratings (IDR) and a 'B' Short-term foreign currency IDR. Fitch has simultaneously assigned a National Long-term rating of 'BB+(rus)'. The Outlooks on the Long-term ratings are Positive.
Fitch needs to understand YATEC's capital structure and the position of the senior unsecured debt within this structure and relative to the senior secured debt more in detail to be able to assign a senior unsecured rating to YATEC's planned domestic bonds.
The ratings reflect YATEC's dominant market position as the largest gas producer and supplier in the Republic of Sakha (Yakutiya) ('BB+'/Positive) accounting for 90% of gas supplies to Yakutsk, the republic's capital. Fitch views the company's operational profile as commensurate with the 'B' rating category. As a hydrocarbons producer, the company operates on a relatively small scale but its production size is comparable to that of a number of similarly rated oil and gas peers, including Russia's Alliance Oil Company Ltd ('B'/Stable) and Afren plc ('B'/Negative) operating in Africa and Iraq. YATEC benefits from a relatively low cost production compared to its Russian and international counterparts.
At the same time, Fitch anticipates that YATEC's gross adjusted leverage-related ratios will remain elevated in 2012-14 with FFO adjusted leverage expected to stay well above 5x (4.6x in 2011), primarily due to the financial guarantees provided by the company to related parties and included by Fitch into adjusted debt calculations as well as because of an intensive capex programme. The financial guarantees granted by YATEC to related parties stood at RUB4.6bn at end-2011, exceeding its gross revenue and accounting for 76% of the gross adjusted indebtedness at end-2011. In addition, Fitch believes that the company's ambitious capex of RUB8.9bn (USD298m) over 2012-16 planned for the upgrade and expansion of the refining facilities and expansion of the retail segment (among other things) is likely to be partly debt funded.
YATEC is unfavourably positioned compared with its similarly rated Russian/CIS and international oil and gas peers based on its leverage metrics. In Fitch's view, YATEC's high levels of gross adjusted leverage coupled with its tight liquidity are more commensurate with a 'B-' rating level.
The Positive Outlook reflects Fitch's expectations that the company may be able to demonstrate a track record of limited incurrence of off balance sheet obligations by not granting additional financial guarantees once the outstanding ones expire. This will enable the company to achieve material deleveraging in the short term, which could support positive rating momentum. Fitch views the company's unadjusted leverage metrics along with its coverage ratios to be more commensurate with the mid 'B' rating category.
In addition, Fitch believes that YATEC's business profile is underpinned by its ability to generate solid and relatively stable and predictable cash flow from operations from its gas business. The agency expects the regulated gas tariffs to continue rising in the context of the domestic gas market liberalisation in Russia. At the same time, the company's gas sales volumes are likely to remain largely unchanged in the short to medium term due to the regional market limitations. As a result, YATEC's gas operations are less exposed to the oil price volatility in contrast to its pure oil peers.
Fitch also views positively YATEC's downstream integration, which should enable the company to diversify its operations by both product and geography and somewhat overcome the limitations embedded in its gas business development. As the only local producer of motor fuels in the Republic of Sakha (Yakutiya), YATEC is well placed to capitalise on the region's strong demand for refined products and geographic location characterised by remoteness and challenging accessibility resulting in high transportation costs for imported fuels. Another competitive advantage of the local market is the resilience of the refined products' prices to oil price fluctuations and negative trends on the global refining market. As a result of further expansion of the downstream segment, Fitch expects an increase of its share in YATEC's cash flow in the medium term.
Positive: Future developments that may, individually or collectively, lead to positive rating action include
- No or limited amount of additional financial guarantees once the outstanding ones expire with a subsequent reduction of FFO gross adjusted leverage to well below 4.0x and closer to Fitch's forecast of unadjusted leverage metrics
- Successful implementation of the downstream expansion and product quality enhancement plans resulting in a higher contribution of the refining business to the company's EBITDA and cash flow
The current Rating Outlook is Positive. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating downgrade. However, future developments that could lead to the Outlook being revised to Stable include:
- Maintaining the elevated gross adjusted leverage ratios due to the provision of new/additional guarantees following the expiry of the current ones and/or incurrence of material financial debt