(The following statement was released by the ratings agency)
July 11 - Fitch Ratings has today upgraded OAO Tatneft’s TATN3.MM (Tatneft) Long-term foreign currency Issuer Default rating (IDR) to ‘BB’ from ‘B+’. Following the upgrade, the Outlook has been changed to Stable from Positive. In addition, its Short-term foreign currency IDR is affirmed at ‘B’.
The upgrade reflects Tatneft’s improved corporate governance profile, following the resolution of critical internal control weaknesses. This is demonstrated by the timely release of annual financial statements, and management’s commitment to improve disclosure by commencing quarterly financial reporting. The upgrade is also based on Tatneft’s demonstrated ability to maintain strong credit metrics, including net debt/EBITDAR of close to zero for both FY07 and FY06 (while gross debt/EBITDAR was also strong at 0.2x and 0.1x during the same period). The ratings take into account a further improvement in Tatneft’s financial profile and operating efficiency in FY07. This includes a strengthening of the EBITDAR margin to about 31.6% from 28.4% in FY06, improved EBITDAR per barrel of production to USD14.2/bbl from USD10/bbl in FY06 and positive free cash flow generation, despite increased capital expenditure and dividends.
The ratings are constrained by a lack of significant proprietary refining capacity, thereby limiting Tatneft’s overall profitability and making it highly dependent on crude oil prices. Fitch notes that Tatneft is in the process of constructing the greenfield Nizhnekamsk refinery and petrochemical complex, which it intends to commission in phases in 2011-2012. Successful completion of this project is likely to substantially improve Tatneft’s vertical integration, bringing it more in line with larger Russian oil companies, and to support Tatneft’s profitability.
At the same time, Fitch notes a number of uncertainties in relation to the refinery project, including the timing of construction completion, rising costs, and the ultimate availability of project financing, which is yet to be arranged for. Also, Tatneft’s below-control ownership in OJSC TANEKO (TANEKO), a company created to construct and operate the Nizhnekamsk complex, and TANEKO’s complex ownership structure are a concern. Tatneft’s interest in TANEKO includes a 40% direct ownership stake and a 28.8% indirect ownership stake through Tatneft’s 48.7% interest in IPCGF, an open-ended fund, which in turn indirectly owns 51% of TANEKO. Fitch also notes Tatneft’s limited upstream expansion potential - at least as far as conventional oil is concerned. However, Tatneft’s scale of upstream operations in the longer term could potentially be expanded via non-conventional oil, should the company succeed in profitably developing a bitumen segment.
Tatneft’s ratings are based on its stand-alone credit profile. The intangible support and influence of Tatneft’s largest shareholder, the government of the Republic of Tatarstan (a constituent of the Russian Federation, rated at ‘BBB-‘/Stable), which indirectly owns approximately 36% of the voting stock of Tatneft are factored into its ratings. They primarily reflect the intangible nature of state support, the balance of benefits and constraints resulting from state ownership, as well as the below-control level of state ownership.
The Stable Outlook is based on Fitch’s expectation that Tatneft will be able to maintain sound credit metrics. Any possible further positive rating action will largely depend on Tatneft’s ability to successfully complete project construction, to gain ownership control of the Nizhnekamsk complex, to improve profitability and operating efficiency, as well as to commence commercial development of the profitable bitumen segment. Tatneft’s ratings and Outlook might come under pressure as a result of severe project delays and costs overruns related to the Nizhnekamsk complex construction, the introduction of a quality bank by Transneft, and deterioration of leverage to above 1x for a prolonged period of time.
Tatneft is Russia’s sixth largest oil company with operations primarily in the Republic of Tatarstan. In FY07, Tatneft’s oil production of 25.9 million tonnes (506,000 barrels of oil per day) accounted for about 5% of Russia’s total oil production.