New York, September 07, 2021 -- Moody's Investors Service ("Moody's") has assigned
a Baa3 rating to Empresa Nacional del Petroleo's (ENAP) $500 million
proposed senior unsecured notes. ENAP's existing ratings
remain unchanged. The outlook is negative.
Net Proceeds from the proposed issuance will be used for liability management
(primarily for its $410 million senior unsecured notes maturing
in December 2021) and other general corporate purposes.
The rating of the proposed notes assumes that the final transaction documents
will not be materially different from draft legal documentation reviewed
by Moody's to date and assume that these agreements are legally valid,
binding and enforceable.
RATINGS RATIONALE
ENAP's Baa3 senior unsecured notes rating reflect its long operating
history, high market share in Chile's refined products market
and increasing business diversification. ENAP is the sole refiner
in the country. Its revenue and cash flow have consistently benefited
from oil and gas exploration and production (E&P), which represented
68% of the company's EBITDA in 2020. However,
ENAP's ratings are constrained by its weak liquidity, the inherent
volatility in commodity prices and the resulting uncertain profitability,
and its high leverage as measured by Moody's-adjusted retained
cash flow/net debt of 7.4% and debt/EBITDA of 8.1x
for the 12 months that ended on 30 June 2021.
Since ENAP is 100% owned by the government of Chile (A1 negative),
the company's Baa3 rating reflects Moody's joint default rating methodology
for government-related issuers. ENAP's Baa3 rating benefits
from five notches of uplift from its b2 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. The government's ability to provide support to ENAP
is measured by its A1 credit rating, weakened somewhat by the negative
outlook.
The proposed notes issuance will lower ENAP's refinancing risk and
will lengthen the company' debt maturity profile. As of June
2021, ENAP had $795 million in total debt maturing in the
remainder of 2021, out of which $410 million correspond to
international bonds maturing in December 2021. In both 2022 and
2023, ENAP´s debt maturities lower to approximately $100
million, mainly bank debt that the company may easily refinance.
The proceeds of the proposed notes' issuance will be used to roll-over
the bond maturity due in December 2021 and to refinance short-term
credit facilities. ENAP's debt refinancing risk is partially
tempered by good capital market access both internationally and locally.
In the first half of 2021, ENAP raised more than $100 million
in local notes and around $280 million in a two-year credit
facility at considerably low interest rates.
The coronavirus pandemic severely hurt ENAP's operations in 2020.
Revenue declined by around 35% from a year earlier and Moody's-adjusted
EBITDA decreased by 43%. However, ENAP managed to
generate positive free cash flow of $42 million in 2020 by lowering
its capital investment (including leases) to $264 million,
from $445 million in 2019; and through cost-reduction
initiatives in non-crude operational and production activities,
which generated savings of around $170 million. The company's
Moody's-adjusted debt/EBITDA increased to 14.8x in 2020,
the highest in the past decade. However, together with oil
prices, fuel demand and crack spreads recovered since mid-2020,
but particularly since the fourth-quarter of 2020, and leverage
lowered to 8.4x as of June 2021.
RATING OUTLOOK
The negative outlook on ENAP's Baa3 ratings reflects the negative outlook
on Chile's A1 rating, given the importance of the sovereign's
credit strength and ongoing support to the company's ratings.
The negative outlook on the sovereign rating reflects increasing risks
to Chile's fiscal strength. Although the country entered the coronavirus
crisis with fiscal buffers and low debt relative to its A-rated
peers, its debt/GDP had been rapidly rising in recent years,
a trend that has been accelerated by the pandemic-induced shock.
Meanwhile, subpar medium-term growth prospects and rising
social demands suggest that it will be difficult from a political economy
perspective to prioritize fiscal consolidation over other competing policy
priorities, which leads to the risk of a continued rise in debt
ratios beyond what we already expect in our baseline scenario.
This would prevent debt stabilization, let alone debt reversal.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade is unlikely given the negative outlook for Chile's A1 rating
and Moody's expectations for continued negative free cash flow at ENAP.
However, 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, 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, the company's BCA or its
rating could be lowered.
The methodologies used in this rating were Integrated Oil and Gas Methodology
published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
ENAP is Chile's national oil company and the second largest state-owned
company in the country. ENAP operates in three business segments:
E&P (9% of revenue and 61% of EBITDA in the second quarter
ended in June 2021, with operations in Chile, Argentina,
Ecuador and Egypt); Refining and Marketing (85% and 21%);
and Gas and Energy (6% and 18%, currently integrated
into Refining and Marketing). ENAP owns three refineries in Chile
and is the only refinery company in the country, with a total crude
distillation capacity of 231 thousand barrels per day. The company
has around two-thirds of the refined products market share in Chile.
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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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
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For any affected securities or rated entities receiving direct credit
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review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
The Global Scale Credit Rating on this Credit Rating Announcement was
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3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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Maria Gallardo Barreyro
Vice President - Senior Analyst
Corporate Finance Group
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Marcos Schmidt
Associate Managing Director
Corporate Finance Group
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