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Rating Action:

Moody's affirms ENAP's Baa3 rating; stable outlook

12 May 2017

New York, May 12, 2017 -- Moody's Investors Service ("Moody's") affirmed Empresa Nacional del Petróleo's ("ENAP") Baa3 global scale foreign currency rating. Moody's maintained the company's b2 Baseline Credit Assessment, which reflects its weak liquidity, elevated financial leverage, volatile refining margins, and small operating size. These credit negatives are counter-balanced by ENAP's strong market position in Chile, its business diversification, and a high level of implicit government support. The outlook on the rating remains stable.

RATINGS RATIONALE

ENAP's Baa3 rating is based on the company's long operating history, high market share in Chile and increasing business diversity. While ENAP is the sole refiner in the country, its revenues and cash flow have steadily benefitted from oil and gas exploration and production, which in 2016 contributed over 30% of EBITDA. In addition, since 2014, the company's power generation business has supported efforts to control costs using ENAP's own natural gas to generate power, which in turn is used in its refining operations or sold to third parties.

However, ENAP's ratings are constrained by a tight liquidity management, the inherent volatility of commodity prices and the resulting uncertain cash flow generation and profitability, as well as elevated debt leverage, which reached 7.4 times in 2016. In that year, ENAP's debt increased only slightly but leverage soared from 5.8x in 2015 given lower operating profit, driven by increasing international crude prices and lower crack spreads. Increasing oil prices indirectly strain ENAP's refining margins since the company is prohibited from passing along increased power generation costs, which in Chile is mostly diesel.

Moody's expects ENAP's leverage to remain elevated in 2017 as the company increases capex related to refinery upgrades and mandatory environmental projects. From 2018 on, leverage should decline as investments mainly in oil and gas production generate increasing cash flows and crack spreads are not materially lower than historical average. Since Chile keeps local fuel prices at parity with prices in the US Gulf of Mexico, changes in international crude prices pass quickly to local prices and do not affect refining margins significantly.

Since ENAP is 100% owned by the Chilean government, the company's Baa3 rating reflects the application of Moody's joint default rating methodology for government-related issuers (GRIs). ENAP's Baa3 rating benefits from five notches of uplift from the b2 Baseline Credit Assessment (BCA, which represents the intrinsic risk of the company, regardless of implicit support) given Moody's assumption of a high probability of support from the government of Chile in a distress situation. As evidence of support, in 2008 the government of Chile injected USD 250 million to ENAP's capital to help the company deal with liquidity constraints.

ENAP is strategically important to the Chilean energy sector as demonstrated by its solid market share as a supplier of 100% of gasoline and 44% of diesel consumption in the country. The government of Chile appoints the company's board members and is very involved in ENAP's budget approval and business strategy. The Chilean government's ability to provide support to ENAP is measured by its Aa3 credit rating and stable outlook, weakened somewhat by the high correlation between the government and the company on credit factors that could cause stress on both simultaneously.

ENAP's liquidity is weak, although supported by the benefits associated with its ownership by the Chilean state. As of December 31, 2016, ENAP's cash stood at USD 66 million, which negatively compares with the USD 756 million in debt maturing in 2017. However, USD 486 million in short term debt are related to bank short term facilities, used to import crude and oil products; Moody's believes that ENAP will continue to be able to roll over these facilitates relatively easily. The constant need to access banking credit facilities is a concern but ENAP's funding strategy and financial policies have allowed the company to quickly adjust local prices to volatile costs and thus protect its profit margin.

The company's refinancing risk is high. Its scheduled debt payments as of December 2016 in the next years are as follows: USD 756 million in 2017, USD 392 million in 2018, USD 582 million in 2019, and USD 2.15 billion thereafter. Additionally, ENAP does not have committed lines of revolving credit. Refinancing concerns, however, are partially tempered by good capital market access. Furthermore, the company's bank loans are currently not subject to financial covenants.

ENAP's stable rating outlook assumes that the company will continue to focus on increasing operating cash flow to reduce leverage over the medium-term and that Chilean government support of the company will remain high.

A significantly improved and sustained financial leverage profile more supportive of the cyclicality and volatility of the refining sector could lead to an upgrade, specifically debt/EBITDA at or below 5x.

If ENAP is unable to continue its deleveraging trend or if there are indications of reduced implicit government support for ENAP, its BCA or its foreign currency rating could be downgraded.

ENAP is Chile national oil company and the second largest state-owned company in the country. The company is 100% owned by the government of Chile (Aa3 stable). ENAP operates in three business segments: Exploration & Production (11% of revenues and 31% of EBITDA in 2016), Refining & Marketing (85% and 72%) and Gas & Power (4% and -2%). ENAP owns three refineries in Chile and is the only refinery company in the country, with a total crude distillation capacity of approximately 230,000 barrels per day. The company's upstream operations hold 139 million boe (barrels of oil equivalent) in total proved reserves, of which 37% are in Argentina, followed by Chile with 35%, Ecuador with 19% and Egypt with 9%. ENAP was founded in 1950 and is headquartered in Santiago, Chile. In 2016, it had total assets in the amount of $5.8 billion.

The methodologies used in these ratings were Refining and Marketing Industry published in November 2016, and Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nymia C. Almeida
VP - Senior Credit Officer
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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