London, 31 March 2017 -- Moody's Investors Service has assigned a first-time Baa3
issuer rating to MOL Hungarian Oil and Gas Plc (MOL), a leading
Central European integrated oil & gas company.
"Our assignment of a Baa3 rating to MOL balances its robust financial
profile supported by solid liquidity, and market-leading
position in Central and Eastern Europe in its oil refining and marketing
business, against its lack of geographic diversification and small
scale relative to its European peers in the upstream segment,"
says Shruti Kulkarni an analyst at Moody's.
Concurrently, Moody's has assigned a Baa3 rating to MOL's
EUR750 million senior unsecured notes due 2023, a (P)Baa3 rating
to its $1 billion Euro Medium Term Note Programme, and a
Baa3 rating to the $500 million senior unsecured notes due 2019,
both issued by MOL Group Finance SA. The outlook on all ratings
is stable.
RATINGS RATIONALE
Today's assignment of a Baa3 issuer rating reflects MOL's
(1) strong financial profile, with gross adjusted debt/EBITDA of
1.5x in 2016 expected to remain in the 1.5x-1.7x
range with positive free cash flow (FCF) generation of around $150-200
million in 2017-18 despite normalization of margins in the downstream
segment from its peak in 2015; (2) strong liquidity profile with
a cash balance of $740 million in 2016 and $3.1 billion
available under its revolving credit facilities; (3) strong oil refining
and marketing presence in the Central and Eastern European (CEE) region
with leading positions in its respective markets; (4) two high quality
refineries with above average complexities that enable MOL to process
sour crudes into high margin refined products; (5) integrated business
profile with a downstream business as well as upstream activities that
provide resilience to the group in the current low oil price environment;
and (6) downstream integration into retail and petrochemicals, which
serves as an important sales channel for refined products and stabilizes
the more volatile refining business.
The rating remains constrained by the (1) lack of geographic and production
diversification of the group's upstream activities with a significant
focus on its domestic markets, Hungary and Croatia; (2) smaller
scale of MOL's upstream activities, compared to other European
peers, which cannot satisfy crude needs for the refining segment
with production averaging at 112 kBOE/day (including subsidiaries and
JV/associates) in 2016; (3) mature and declining reserve life of
the upstream assets in the CEE region, which will require organic
and inorganic expansions in the next 3-4 years to maintain current
production levels; (4) low diversification in terms of crude oil
supply to the refining segment with Russia accounting for 75% of
the crude oil requirements, which implies MOL's heavy reliance
on the Friendship Pipeline through Belarus and Ukraine from Russia.
Looking ahead, Moody's expects that MOL's refining margins
will normalize from their peak of $6.1/bbl in 2015 and assumes
margins of around $5.0-5.5/bbl and an oil
price of $40-60/bbl in 2017-19. MOL is expected
to maintain its strong financial performance with adjusted EBITDA in the
range of $2.0-$2.2 billion with a 60%-65%
contribution from its downstream segment. MOL should be able to
generate positive FCF of around $150-$200 million
in 2017-19 after capex and dividend payments of $1.5-$1.6
billion and $200-250 million, respectively.
Moody's expects that MOL's adjusted gross debt/EBITDA ratio
will remain in the range of 1.5x-1.7x in 2017-19.
MOL currently consolidates INA, the Croatian Oil company,
in which MOL owns a 49.1% stake. The INA consolidation
currently benefits only the upstream segment as the two refineries in
Croatia, which are part of the INA group only marginally contribute
to group EBITDA. INA's contribution to the upstream segment
is expected to remain in the range of 15%-20% of
the total group EBITDA in 2017-19. Capex investments will
be required to maintain the current level of production of the declining
reserve life of the INA assets, which could cause a drain on the
cash flow of the MOL group in the coming years. However,
Moody's notes that this risk is mitigated as the company should
be able to derive substantial proceeds if MOL decides to sell its stake
in INA, which can be used to increase production in the upstream
assets. We also note the positive development of the arbitration
ruling in favour of MOL in December 2016, which materially reduces
the risk of MOL losing the controlling stake over INA assets.
The Baa3 rating also takes into account the rating positioning of MOL
compared to its European rated peers OMV AG (OMV), Repsol S.A.
(Repsol) and Polski Koncern Naftowy Orlen S.A. (PKN Orlen).
OMV (Baa1 stable, Baseline Credit Assessment: baa2) and Repsol
(Baa2 negative) are seen as having a more solid business profile with
larger scale compared to MOL, displaying a more diversified and
stronger production and reserves base in the upstream segment.
PKN Orlen (Baa3 stable, Baseline Credit Assessment: ba1) is
seen as having a smaller but growing E&P business than MOL and a similar
financial profile. PKN Orlen also benefits from its government
related issuer status, which provides a one-notch uplift
to the standalone rating of the group considering the 'strong'
support from the Polish government, given its 27.5%
stake in PKN.
MOL was not considered as a government related issuer as per Moody's
methodology despite the Government of Hungary's (Baa3 stable) stake
of 25.2%, as a restriction that no shareholder may
exercise more than 10% of the voting rights limits the government's
voting rights in the company. Moody's considers the government
as being a passive owner not involved significantly in the operating and
financing activities of the company and it does not have a board representation.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that the company
will be able to maintain its strong financial profile despite normalization
of the margins in the downstream sector. The outlook also reflects
positive FCF generation in the coming years 2017-19 and a strong
liquidity profile.
WHAT COULD CHANGE THE RATING - UP
Although an upgrade to Baa2 in the near term is unlikely, geographic
diversification and a more balanced business profile with larger scale
in the upstream division could lead to an upgrade. An upgrade would
also require that MOL maintain its strong financial profile driven by
cost improvement programs in the downstream segment.
WHAT COULD CHANGE THE RATING - DOWN
The rating could be downgraded if there is a material deterioration in
the financial profile of the company due to weak refining margins or an
increase in leverage with adjusted gross debt/EBITDA rising sustainably
above 2.5x due to high capital expenditure or acquisition spending.
Negative FCF generation or cash flow drain due to the INA assets impacting
MOL's liquidity profile could also result in a downgrade.
The rating might also be downgraded if there is a downgrade of the sovereign
rating of Hungary.
The principal methodology used in these ratings was Global Integrated
Oil & Gas Industry published in October 2016. Please see the
Rating Methodologies page on www.moodys.com for a copy of
this methodology.
MOL Hungarian Oil and Gas Plc is a leading Central European integrated
oil & gas company, with 2P (proved and probable) reserves of
459 million BOE and average production of 112 kBOE/day as of year-end
2016. In 2016 the company reported USD12.8 billion in revenues
and a clean CCS EBITDA of USD2.15 billion.
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.
Shruti Kulkarni
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
