(The following statement was released by the rating agency)
Sept 13 -
Summary analysis -- OAO Gazprom ----------------------------------- 13-Sep-2012
CREDIT RATING: BBB/Stable/A-2 Country: Russia
Primary SIC: Crude petroleum
and natural gas
Mult. CUSIP6: 36828X
Credit Rating History:
Local currency Foreign currency
20-Aug-2010 BBB/A-2 BBB/A-2
10-Jul-2009 BBB/A-3 BBB/A-3
The ratings on Russia-based OAO Gazprom reflect its position as the world’s largest gas producer and our opinion that there is an “extremely high” likelihood that Gazprom’s controlling shareholder, the Russian Federation (foreign currency BBB/Stable/A-2; local currency BBB+/Stable/A-2; Russia national scale ‘ruAAA’), would provide timely and sufficient extraordinary support to Gazprom in the event of financial distress.
We assess Gazprom’s stand-alone credit profile (SACP) at ‘bbb-', with a “satisfactory” business risk profile and “intermediate” financial risk profile. This takes into account Gazprom’s vast proven reserves, cost-competitive production, vertical integration, monopoly in profitable gas exports, and the company’s policy to finance capital expenditures through internally generated cash instead of debt. Key constraints in our view include large capital expenditures, exposure to commodity price fluctuations, exposure to the risks of operating in Russia, and to transit risks in Ukraine and Belarus. Our assessment of Gazprom’s stand-alone credit profile factors in both positive and negative sides of Gazprom’s relationship with the Russian government. The benefits, in our opinion, include privileged access to new gas projects, strong bargaining power, demonstrated access to financing from state-controlled banks, and historically manageable dividend payout. We believe negative aspects include the group’s still low--albeit increasing--domestic gas prices, and track record of sizable debt-financed acquisitions and new projects where the strategic rationale may outweigh economic factors.
In accordance with our criteria for government-related entities (GREs), our view of an “extremely high” likelihood of extraordinary government support is based on our assessment of Gazprom‘s:
-- “Critical” role as the owner of Russia’s gas transportation network and supplier of almost 40% of the country’s energy requirements at relatively low regulated prices. Gazprom is responsible for about 12% of Russia’s exports, and is a key tool in strengthening the government’s control over the strategic hydrocarbon sector. In our view, if Gazprom were to default, it would have negative consequences for the government and other Russian companies and financial institutions; and
-- “Very strong” link with the Russian government, which seems to be significantly involved in Gazprom’s strategy and operations. We understand that the government intends to maintain its controlling stake in Gazprom, as well as management control and active involvement in defining the group’s strategy. The Russian government’s ability to support Gazprom is in our view supported by the sovereign’s considerable fiscal reserves and track record of support to various systemically important entities through the 2008 turmoil. Still, the government only controls a 50.002% stake, and the company’s operations are quite autonomous. The Russian economy relies heavily on oil and gas, which may increase the correlation between the financial performance of Gazprom and Russia.
S&P base-case operating scenario
We expect Gazprom’s 2012 EBITDA to be considerably below record 2011 levels, but still quite solid.
The regular domestic price increase of domestic gas will not offset the mineral extraction tax (MET) hike in 2012-2013. Gazprom’s domestic prices are set low by the regulator ($90 per thousand cubic meters in the first quarter 2012, corresponding to about 40% of export netback) and are subject to regular 15% increases each January. In 2012, the price increase was postponed to July, after the March 2012 presidential elections and after the heating season. The Russian government considers further increasing MET to tax away the major part of Gazprom’s expected domestic price increase.
In addition, Gazprom faces competitive and, potentially, regulatory pressures from the European Commission on exports, because its prices are linked to oil products and are currently quite high. This triggered contract renegotiation, price discounts, and compensation to be paid to customers. Demand can be pressured by weak economic performance. Still, the presence of take-or-pay provisions, existing pipeline infrastructure and fundamentally low costs of traditional gas should in our view help Gazprom retain a solid market share in Europe, in our view.
Under our standardized pricing scenario of Brent at $100 per barrel (bbl) in 2012, $90/bbl in 2013 and $80/bbl thereafter, and assuming the link between oil and gas prices remains in place, we expect Gazprom’s EBITDA to decline to just over $40 billion over the long term, which we still see as a comfortable level.
S&P base-case cash flow and capital-structure scenario
We expect Gazprom to retain healthy credit metrics, albeit lower than in the record year 2011. Over the longer term, under our standardized price assumptions, we expect Gazprom’s adjusted ratio of funds from operations (FFO) to debt to be above 50%. We expect Gazprom will be able to adjust its capital expenditures depending on the operating cash flow it generates, as the company’s track record suggests. Still, we will continue to focus on Gazprom’s capital expenditures--notably on new pipeline routes and the development of huge new reserves in Yamal--and on acquisitions.
We view Gazprom’s liquidity as adequate, with a ratio of liquidity sources to liquidity needs above 1.2x, because material short-term debt will likely be offset by positive free operating cash flow (FOCF), substantial cash reserves, and significant flexibility in its investments. In addition, we believe that Gazprom has a fair degree of access to refinancing from state-controlled banks, if needed.
As of March 31, 2012, Gazprom’s key sources of liquidity included:
-- Russian ruble (RUB) 685.8 billion of cash and RUB26.0 billion of short-term investments, of which we assume about RUB60 billion will be tied to operations;
-- More than RUB50 billion in committed credit lines; and
-- Solid FFO.
In addition, Gazprom placed Eurobonds for $1.0 billion and EUR1.4 billion in July 2012, and its 96%-owned subsidiary JSC Gazprom Neft (BBB-/Stable/--) placed $1.5 billion in Eurobonds in September 2012, which further supports liquidity.
Key liquidity needs included:
-- Large capital expenditure needs. We understand that about RUB1.2 trillion has been budgeted for the group, including the oil and electricity business, but we believe this amount can be flexible if prices decline, as Gazprom’s track record shows;
-- Dividends of RUB212 billion announced on 2011 income; and
-- Considerable short-term maturities of RUB383.5 billion.
We believe that Gazprom, being Russia’s largest corporate borrower and a government-owned entity, enjoys fair access to financing on the market and from state-owned banks. However, the group’s debt is quite extensive to rely solely on a still developing domestic financial system, and its access to international capital markets can fluctuate.
The stable outlook reflects our expectation that Gazprom will likely be able to finance essentially all of its capital expenditures from FFO rather than by increasing its debt. We assume that in line with the Russian government’s policy for GREs, Gazprom’s dividends are likely to increase to a 25% payout from their historically moderate levels (historically, a 25% payout under Russian accounts corresponded to about 16%-17% of International Financial Reporting Standards net income). Under our standardized price scenario we expect Gazprom’s ratio of FFO to adjusted debt to be above 50% in the long term. The actual ratio was 122% in 2011 and 151% in the 12 months ended March 31, 2012, which is in line with our current expectations for the rating given that actual prices were higher than our standardized scenario.
We currently see limited ratings upside, but we believe it could result from a sovereign upgrade or a strengthening SACP over the medium to long term. In accordance with our methodology for GREs, we also consider rating downside as quite limited, and over the longer term could result from a downgrade of the sovereign local currency rating by more than one notch, or if large debt-financed acquisitions pushed Gazprom’s stand-alone credit quality below ‘b+', which we see as very unlikely.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012
-- Standard & Poor’s Raises Its Oil Price Assumptions; Natural Gas Price Assumptions Unchanged, 22-Mar-2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010