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Rating Action:

MOODY'S CHANGES OUTLOOK OF TNK-BP TO POSITIVE FROM STABLE

24 Jan 2006
MOODY'S CHANGES OUTLOOK OF TNK-BP TO POSITIVE FROM STABLE

London, 24 January 2006 -- Moody's Investors Service has today changed the outlook to positive from stable on TNK-BP's ratings. These include the Ba1 long term corporate family rating of TNK-BP International Ltd ("TNK-BP"), the Ba2 senior unsecured rating of the USD5.0 billion debt issuance programme issued by TNK-BP Finance SA ("TNK-BP Finance") and the Ba2 senior unsecured rating on JSC Tyumen Oil Company's ("OAO TNK") USD700 million loan participation notes due 2007.

Moody's last rating action on TNK-BP was on 15 December 2004, when the agency upgraded TNK-BP's ratings to Ba1/Ba2. The senior unsecured ratings are notched to reflect the relatively high level of secured debt within the group, which puts unsecured creditors in a subordinated position to secured creditors.

The change of outlook is reflected by (1) the company's ongoing strong cash flow generation, supported by both high oil prices and improvements to operating performances and processes, (2) improved corporate structure following recent streamlining, as well as further strengthening of corporate governance and financial transparency standards, and (3) Moody's view of recent moderate improvements in Russia's operating environment for private companies and the support afforded by TNK-BP's political endorsement, despite some ongoing uncertainties.

Moody's believes that the company's credit profile has continued to improve, given its strong financial performance, underpinned by a combination of rising Urals prices and improved and flexible techniques to capture profitable netbacks, as well as steady production growth, and low cost operations. In 2004, TNK-BP generated USD6.2 billion of operating cash flow and USD 6.4 billion in the first 9 months of 2005. Consequently, Moody's expects TNK-BP's retained cash flow to net adjusted debt to reach a fairly solid 40% for the full year.

Moody's adds that the company's corporate governance and financial transparency have highly improved over recent years, and particularly following the restructuring of the group's complex structure to bring most Russian operating subsidiaries under one domestic holding company. In addition, the management is optimising capital efficiency by implementing a divestment programme of non-strategic assets. In concomitance with the restructuring of its operations and asset portfolio, TNK-BP's strategy is geared towards increasing the long term recoverability of its mature assets, growing via the acquisition of new licenses and the development of green field projects.

The change in outlook also reflects Moody's view of some gradual improvements in the overall Russian operating environment for private companies in the oil and gas sector. Moody's states that despite the government's greater presence in one of Russia's most strategic industries and higher tax, excise and socio-political burdens facing the industry today, the Russian government has given supportive signs to stem investor confidence, notably the recent share liberalisation of Gazprom (rated Baa1/Baa2, stable outlook). Moody's also adds that the risk of substantial back tax claims is lower today, given that tax authorities seem close to finalising their investigations of critical years. While some uncertainty concerning back tax demands for the years 2002 and 2003 for TNK-BP remains, the rating agency does not expect final settlements to be excessive. This view is supported by TNK-BP's recent settlement of its 2001 tax claim for USD247 million, which was significantly below the originally demanded amount of USD938 million. License renewal and ownership disputes remain prevalent in Russia, but Moody's notes TNK-BP's good track record to date of winning license allocations.

TNK-BP's ratings remain underpinned by the group's significant scale in terms of reserves and production, which position it as Russia's second largest integrated oil & gas company. The ratings are also supported by the company's low cost production and the high level of integration with its downstream business.

Conversely, ratings remain constrained by some field concentration, given that three fields account for ca. 60% of reserves, and the need for license extension at its vast Samotlor field, which expires in 2013. At the same time, TNK-BP's ratings incorporate the expectation of a gradual increase in debt to finance new investments in both new and mature fields in the coming years, though not beyond its leverage target of 25-35%. Ratings also assume that management will retain flexibility in its dividend policy to ensure a certain level of stability in its retained cash flow, depending on the oil price and investment requirements.

Moody's states that there remains upside pressure on TNK-BP's ratings, which could intensify and thus result in an upgrade over the short to medium term. Such action could be supported by (1) further strengthening of TNK-BP's financial and operating metrics as evidenced in cash flow generation, production costs, per barrel margins, production growth and capital efficiency, (2) TNK-BP's ongoing ability to capture profitable netback channels, (3) sustained evidence of TNK-BP's unimpaired ability to operate without substantial political or bureaucratic interference, as well as the finalisation of tax audits related to 2002 and 2003, and (4) evidence of largely equal treatment of private and state-owned companies in competition for new license areas or acquisitions, and particularly sustained progress in the extension of the group's Samotlor license.

TNK-BP International is the principal holding company in the group, and is guarantor of the rated debt issued by OAO TNK and TNK-BP Finance. TNK-BP International is wholly owned by TNK-BP Ltd, the ultimate holding company of the group. The scope of consolidation for both TNK-BP International and TNK-BP Ltd is largely identical (98% of assets) as the remaining 25% stake in Sidanco previously held by TNK-BP Ltd has been transferred to TNK-BP International.

TNK-BP, headquartered in the British Virgin Islands, is one of the largest oil companies in Russia, jointly owned by BP Plc and Alfa Access/Renova. At year-end 2004, the group had just above 8 billion barrels of proved SEC (to economic life of fields) reserves and in the first 9 months of 2005 produced close to 1.56 million barrels of oil per day. TNK-BP generated revenues of USD14.3 billion in 2004.

London
Philipp L. Lotter
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Stuart Lawton
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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