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Announcement:

Moody's: Rosneft's deals with Indian companies will have a mixed credit impact

21 Mar 2016

London, 21 March 2016 -- On 16 March, OJSC Oil Company Rosneft (Rosneft, Ba1 on review for downgrade) announced a number of deals at different stages with ONGC Videsh Limited (ONGC, Baa2 stable), and a consortium of Indian oil companies, including Indian Oil Corporation Ltd (IOCL, Baa3 positive), Oil India Limited (OIL, Baa2 stable), and Bharat PetroResources Limited (BPRL, not rated), about farming out of some of Rosneft's assets as well as with Essar Group (not rated) about acquiring Indian refinery, said Moody's Investors Service.

If and when executed, these deals will have a mixed impact on the company's credit profile:

1) The farming out of Vankor (owned by CJSC Vankorneft) and Taas-Yuryah (owned by LLC TYNGD) oil and gas deposits at fair valuations will generate by various estimates of $4 billion - $4.3 billion. These deals will improve the company's liquidity profile while the Indian partners' financial support will ease the burden to develop Taas-Yuryah deposit. If the cooperation is successful, it could pave the way to a joint development of fields neighbouring Vankor.

2) The potential $2 billion - $3 billion acquisition of a non-controlling 49% stake in Indian oil refinery Essar Oil Limited (not rated) is credit negative as it has the potential to increase the company's leverage while the benefits are not clear.

Farming out of Vankor and Taas-Yuryah to ONGC and consortium of Indian oil companies

We view the deals on farming out of Vankor and Taas-Yuryah oil and gas deposits as not having any immediate impact on Rosneft, although they would improve the company's liquidity profile while the company remains under EU/US financial sanctions and will boost its presence in the important Indian oil market.

Rosneft signed definitive agreements with the consortium of IOCL, OIL and BPRL to sell 29.9% in the charter capital of LLC TYNGD, which is a joint venture between Rosneft, owing 80%, and BP, owing 20%, to develop Srednebotuobinskoye deposit located in the Far East of Russia. The deposit currently produces 20,000 barrels of oil per day (bopd) with an expected peak production of above 100,000 bopd by 2021. The deal value, by various estimates, is about $1.28 billion. We estimate that the ramp up of this field will require RUB150-RUB200 billion. The participation of external parties will ease financial pressure on the company in 2016-21, when the project will reach its full capacity. Following the closure of the transaction, Rosneft would retain a controlling 50.1% stake in the asset and would continue consolidating TYNGD in its financials. Rosneft bought 65% in TYNGD in 2013 for $2.1 billion when oil prices were higher. In the current low oil price environment, Rosneft seems to have realised full potential from the deal, monetising its stake.

Rosneft also signed a heads of agreement for the potential disposal of 23.9% in the CJSC Vankorneft, which is the owner of Vankor field and North Vankor licence, to the consortium of IOCL, OIL and BPRL for total consideration, according to various estimates, of about $2 billion. CJSC Vankorneft is currently owned by Rosneft. In 2015 Rosneft agreed to sell 15% stake in Vankor to ONGC for total consideration estimated by various sources at about $1.27 billion and this deal is currently being closed. Rosneft also signed a memorandum of understanding with ONGC to consider potential disposal of additional 11% in CJSC Vankorneft to ONGC. Vankor is Russia's second-largest field, with low cost oil accounting for 4% of Russian production and currently producing oil at a peak level of approximately 440,000 bopd. Vankor is a well-developed low cost oil field located in Eastern Siberia. Following these transactions, Rosneft would retain controlling 50.1% stake in CJSC Vankorneft and would continue playing a key role in developing Vankor oil cluster (encompassing Suzun, Tagul and Lodochnoe deposits coming on stream in 2016, 2019 and 2020, respectively, with combined peak capacity of about 200,000 bopd) leveraging on its partners' financial support and technological expertise.

Potential acquisition of Essar Oil Limited

We view the announced transaction regarding the potential acquisition of a non-controlling 49% stake in the private Indian Essar Oil Limited, which Rosneft intends to close in June 2016, as credit negative. Essar Oil Limited comprises a Vadinar refinery with an annual capacity of about 20 million tonnes and about 1,600 stations located in India. The partners plan to substantially increase the refinery's capacity to 25 million tonnes and increase the number of stations to 5,000 within the next two years, which will require substantial capital expenditure. We note that Rosneft's capex is fairly ambitious as it plans to increase its capex (in Russian rouble terms) by up to 30% in 2016 compared with 2015, which will range between RUB600 billion and RUB900 billion, subject to market conditions. Additional capital expenditure related to this refiner where Rosneft doesn't have control, could stretch the company's free cash flows while the payback from such investment is not clear.

We estimate that deal value would range at $2-$3 billion. We note that Rosneft has substantial financial debt of about $47.5 billion as of 30 September 2015, and prepayments received under long-term oil and petroleum products supply agreements total about $43.4 billion as of the same date, which we treat as debt-like item. Rosneft will have to repay about $13.7 billion and $11.3 billion of debt in 2016 and 2017, respectively. The acquisition of 49% in Essar Oil Limited could therefore become a substantial stretch on Rosneft's liquidity profile, although parties will continue negotiating deal terms, including the acquisition price and deal structure, which are not yet fully agreed.

The Indian economy relies on growing imports of oil totalling more than 4 million bopd, with imports satisfying more than 85% of oil demand. The refining sector is therefore very important to Indian economy. This sector is quite fragmented in India with several state owned companies responsible for the majority of refining throughput. Vadinar refinery is responsible for only about 8%-10% of oil refined in India. Additionally, we do not expect Rosneft to export oil from Russia to the Vadinar refinery, despite it reporting good refining margins of about $8 per barrel and being the third largest oil refinery in India. As such, synergies from this perspective seem doubtful.

There is also risk associated with Essar Group having become a private company in December 2015. If the delisting leads to a deterioration of corporate governance standards at Essar Group, it could increase execution risks and prevent Rosneft from extracting value from the joint venture. Essar Oil Limited has not paid dividends for the past several years and it is not clear how Rosneft's acquisition of this minority stake will create value.

OJSC Oil Company Rosneft - in which the Russian state holds a 69.5% share via its fully owned agent OAO Rosneftegaz (not rated) - is Russia's largest integrated oil and gas company. Rosneft's proved oil and gas reserves as of 30 September 2015 amounted to 43 billion barrels of oil equivalent (boe), in accordance with Petroleum Resources Management System. Daily production for the last 12 months ended 30 September 2015 stood at 5.2 million boe. The company's consolidated refining capacity covers approximately half of the group's consolidated crude oil production. For the nine months ended 30 September 2015, Rosneft reported consolidated revenue net of export duties and EBITDA of $66.8 billion and $15 billion, respectively.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Denis Perevezentsev
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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Moody's: Rosneft's deals with Indian companies will have a mixed credit impact
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