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Rating Action:

Moody's assigns Baa3 issuer rating to MOL; stable outlook

31 Mar 2017

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

No Related Data.
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