New York, September 20, 2022 -- Moody's Investors Service, ("Moody's") has affirmed Empresa Nacional del Petroleo's (ENAP) Baa3 senior unsecured ratings and has raised its Baseline Credit Assessment (BCA) to b1 from b2; the outlook was changed to stable from negative.
Affirmations:
..Issuer: Empresa Nacional del Petroleo
....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3
Upgrades:
..Issuer: Empresa Nacional del Petroleo
.... Baseline Credit Assessment, Upgraded to b1from b2
Outlook Actions:
..Issuer: Empresa Nacional del Petroleo
....Outlook, Changed To Stable From Negative
RATINGS RATIONALE
The affirmation of ENAP's Baa3 senior unsecured ratings and rising of its Baseline Credit Assessment (BCA) to b1 from b2 reflect the strengthening of the company's standalone credit profile as a result of improved operating performance and enhanced liquidity.
Since ENAP is 100% owned by the government of Chile (A2 stable), the company's Baa3 rating reflects Moody's joint default rating methodology for government-related issuers. ENAP's Baa3 rating benefits from four notches of uplift from its b1 BCA, which is a measure of a company's intrinsic credit risk regardless of support considerations. Moody's assumes high correlation between the government and the company on credit factors that could cause stress on both simultaneously and high probability of support from the government of Chile in case of a distress situation. ENAP's position in the fuel distribution market in Chile, with over half of local market share, is strategic to secure the country's sustainable energy supply. Also, track record of Government support include $250 million equity injection in 2008 and $400 million in 2018; and the fact that the Government has waived its right to receive any dividends for more than a decade and approves the company's budget and appoints board members. The government's ability to provide support to ENAP is measured by its A2 credit rating.
On September 15, the Government of Chile's long-term local and foreign currency issuer and senior unsecured ratings were downgraded to A2 from A1, driven by expectation of a gradual weakening of fiscal and economic trends at a time of structurally higher social spending. The outlook was changed to stable from negative. Given the importance of ENAP to the energy industry in Chile and the relevance of the industry to the country's economy, Moody's does not see changes in the willingness and ability of the government to provide extraordinary support to ENAP in case of need. Moody's has affirmed ENAP's Baa3 ratings because the downgrade of ENAP's sponsor to A2 is balanced by the strengthening of the company's intrinsic credit profile, as reflected in its higher BCA.
ENAP's b1 BCA reflect its long track record and strong competitive position in the refined products market in Chile, where ENAP is the sole refiner and accounts for over half of local refined products sales, with around 90% of local gasoline sales and around 50% of diesel sales, among others. ENAP's credit profile is also aided by its business diversification, with oil and gas exploration and production (E&P) in Chile, Argentina, Egypt and Ecuador (49% of reported EBITDA as of fiscal-year 2021) and refining and marketing operations in Chile (51%). ENAP's ratings are constrained by the inherent volatility in commodity price and by the threat of increased competition from refined product imports from US refiners and global refining capacity additions; also, the upstream, downstream, and gas and power sectors are highly capital intensive.
Since 2021 ENAP has focused on a strategic plan to rise margins through the optimization of its cost structure and the incorporation of digital technology for crude purchases and refining processes, among others. As of the last twelve months ended June 2022 (LTM Jun-22), ENAP's operating margins rose to 7.9%, up from 4.7% in 2021 and 1.6-1.8% before the pandemic; this was the result of a combination of (i) an increase in the refining margins (9% 6M22 vs 2.5% 2019) and the optimization of the cost of the basket of crude oil purchased in the R&C business , and (ii) higher volumes and a higher Brent price in the E&P business. As a result, EBITDA (Moody's adjusted) rose to $1.2 billion in LTM Jun-22, up from $697 million in 2021 and $544 in 2019; while leverage as measured by gross debt to EBITDA (Moody's adjusted) lowered to 4.0x as of LTM Jun-22, from 6.3x in 2021 and 8.4x in 2019. Moody's expects EBITDA of around $1.4 billion in 2022 and $1.1 billion in 2023, keeping debt to EBITDA in the 3.5x-4.5x range.
ENAP's liquidity has been historically weak but has strengthened recently aided by internally generated cash flow. As of June 2022, the company's cash position of $243 million, committed bank credit facilities of around $200 million, and around $600 million in Cash from Operations in the next twelve months compare favorably with $390 million in short-term debt. ENAP funds capital expenditures with internally generated cash flow; the company has generated positive free cash flow since 2019. Access to capital through local and international bond markets and financial institutions also supports ENAP's liquidity profile.
ENAP has pursued a more prudent financial policy over the past few years as evidenced by overall lower indebtedness which, aided by improved operating margins, has led to a significant reduction in the company's overall leverage metrics. Additionally, the company continues to hedge against the impact of sudden changes in crude oil prices on refining margins. ENAP's corporate governance law follows the best practices of the private sector; but the company continues to be the State's arm to guarantee Chile's supply of fuels regardless of business conditions.
RATING OUTLOOK
ENAP's stable outlook assumes that the company will continue to focus on maintaining adequate operating cash flow and leverage over the medium-term and that the government of Chile's support of the company will remain high.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Over time a significantly improved and sustained financial leverage profile more supportive of the cyclicality and volatility of the refining sector could lead to an upgrade of ENAP's BCA; quantitively, debt/EBITDA sustained at or below 3.5x (4.0x LTM June-2022) and EBIT to interest expense coverage above 3.0x (4.4x as of LTM Jun-22); while at the same time maintaining an adequate liquidity profile. An upward rating movement would also be subject to the relative position of Chile's sovereign rating given the importance of the sovereign's credit strength in its ability to provide extraordinary support to the company.
ENAP's BCA may be lowered if the company's credit metrics and /or liquidity profile deteriorate; quantitively, if debt to EBITDA rises and is sustained above 5.5x and EBIT to interest expense lowers below 2.0x. Any indication of a decline in the level of support from the Government of Chile would also put downward pressure on the company's ratings.
The methodologies used in these ratings were Integrated Oil and Gas Methodology published in September 2019 and available at https://ratings.moodys.com/api/rmc-documents/64319 , and Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
Founded in 1950, Empresa Nacional del Petroleo (ENAP) is Chile's national oil company and the second-largest state-owned company in the country. The company is 100% owned by the Chilean government. In the 12 months that ended 30 June 2022, it had total revenue of $10.7 billion and total assets of $8.0 billion.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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Maria Gallardo Barreyro
VP - Senior Credit Officer
Corporate Finance Group
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Marcos Schmidt
Associate Managing Director
Corporate Finance Group
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