New York, August 28, 2017 -- Moody's Investors Service ("Moody's") affirmed Empresa Nacional del Petróleo's
("ENAP") Baa3 global scale foreign currency rating. This rating
action follows Moody's decision, on August 24, 2017,
to change the outlook on the government of Chile's Aa3 rating to
negative from stable. Moody's maintained ENAP's Baseline
Credit Assessment ("BCA") at b2. The outlook on the
rating remains stable.
Outlook Actions:
..Issuer: Empresa Nacional del Petroleo
....Outlook, Remains Stable
Affirmations:
..Issuer: Empresa Nacional del Petroleo
....Senior Unsecured Bonds, Affirmed
Baa3
RATINGS RATIONALE
ENAP's Baa3 rating and b2 BCA are based on the company's long operating
history, high market share in Chile and increasing business diversity.
While ENAP is primarily a refining company, its revenues and cash
flow have 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 sustained
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.
ENAP's Solomon Complexity Index is 10.8, which supports
a solid product slate at 80% between gasoline and diesel.
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 8.2x as of the last 12 months ended
June2017. In the period, ENAP's debt rose only slightly but
leverage increased from 7.4x in 2016 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.
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 its b2 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 case of 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. In addition,
in July 2017 the Congress approved a new corporate governance law for
ENAP that will allow it to receive up to USD 400 million in equity contribution
from the government before December 2018. The government of Chile
appoints the company's board members and is closely involved in ENAP's
budget approval and business strategy. The government's ability
to provide support to ENAP is measured by its Aa3 credit rating and negative
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 stable Baa3 rating outlook assumes that its credit metrics will
gradually improve starting in 2018. The company's financial profile
will improve if it continues increasing business diversification and operating
cash flow, which would help reduce leverage over the medium-term.
The stable outlook also assumes that Chilean government support of the
company will remain high.
Moody's expects ENAP's leverage to remain elevated in 2017 as the company
increases capital spending related to exploration and production,
refinery upgrades, and mandatory environmental projects.
From 2018 on, leverage should decline as investments mainly in oil
and gas production generate increasing cash flows, crack spreads
are not materially lower than historical average, and the company
uses equity to fund a portion of capital spending. Since Chile
keeps local fuel prices at parity with prices in the US Gulf of Mexico,
changes in international crude prices tend to quickly pass to local prices
and do not affect refining margins significantly.
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. Although the country
can import fuel from international suppliers, ENAP has the bulk
of the pipeline and storage infrastructure in Chile, which supports
its business position. In addition, the company's crude
oil production represents approximately 15% of the total required
by its refineries.
ENAP's liquidity is weak, although supported by the benefits associated
with its ownership by the Chilean state. As of June 30, 2017,
ENAP's cash stood at USD 115 million, which negatively compares
with the USD 581 million in total debt maturing from July 2017 to December
2018. However, USD 340 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.
ENAP's refinancing risk is high. Its scheduled long term
debt payments as of June 2017 in the next years are as follows:
USD 161 million in 2017, USD 420 million in 2018, USD 613
million in 2019, and USD 2.4 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.
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 start its deleveraging trend in 2018 or if there
are indications of reduced implicit government support for ENAP,
its b2 BCA could be lowered or its Baa3 rating could be downgraded.
ENAP is Chile national oil company and the second largest state-owned
company in the country. 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 and is the only refinery company in Chile, with
a total crude distillation capacity of approximately 230,000 barrels
per day. As of June 2017, the company's upstream operations
hold 145.6 million barrels of oil equivalent in total proved reserves,
of which 38% are in Argentina, followed by Chile with 29%,
Ecuador with 26%, and Egypt with 7%. ENAP was
founded in 1950 and is headquartered in Santiago, Chile.
In June 2017, it had total assets in the amount of $6.1
billion.
The methodologies used in these ratings were Refining and Marketing Industry
published in November 2016, and Government-Related Issuers
published in August 2017. 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:
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