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Global Credit Research - 22 Oct 2010
Moscow, October 22, 2010 -- Moody's Investors Service has today assigned a provisional rating of (P)Baa2
to the upcoming Eurobond issue by OAO Lukoil ("Lukoil").
The issuer of the notes is Lukoil International Finance B.V.,
an indirect and wholly owned subsidiary of OAO Lukoil. The rating
of the notes is based on an irrevocable and unconditional guarantee from
OAO Lukoil and is in line with the company's issuer rating of Baa2.
The outlook is stable.
The notes will be general unsecured and unsubordinated obligations of
Lukoil International Finance B.V., ranking senior
to all present and future subordinated obligations and equal in right
of payment to all present and future unsecured and unsubordinated obligations.
With OAO Lukoil guaranteeing the issue, the noteholders would rely
solely on Lukoil's credit quality to service and repay the debt.
Upon a conclusive review of the transaction and associated documentation,
Moody's will endeavour to assign a definitive rating to the Notes issue.
A definitive rating may differ from a provisional rating.
The proceeds are expected to be used by Lukoil for general corporate purposes,
including the refinancing of existing indebtedness. At the same
time, Moody's believes the Eurobond issue will support Lukoil's
liquidity position, taking into account substantial debt repayments
the company is facing in the next 12 months. It will also positively
contribute to the company's debt portfolio profile, leading
to its greater diversification and centralisation of funding, and
increasing the average maturity.
According to Moody's, Lukoil's Baa2 issuer rating is
supported by the company's historically robust operational performance
and conservative leverage profile. Despite the global market downturn
and low oil prices, the company's financial metrics remained
strong in 2009 with adjusted RCF/Net Debt of 85% and adjusted Debt/Book
Capitalisation of 20%. In H1 2010, Lukoil's
financial profile strengthened on the back of the gradual market recovery
for oil and gas players globally and the stabilized oil prices.
Additionally, Lukoil's profile benefited from its relatively
conservative financial policy and the absence of any major M&A activity
during the period -- indeed, as of H1 2010, the adjusted
Debt/Book Capitalisation ratio had decreased to 17% and adjusted
LTM RCF/Net Debt improved to 125%. The recent USD4.4
billion share buy-back transaction, which was completed in
August/September 2010, will have a moderate impact on the leverage
profile of the company as it was primarily funded by the company's
healthy cash reserves, with debt financing limited to a USD1.5
billion club loan. Based on current expectations for Lukoil's
2010 operating performance and cash flow generation, Moody's
believes that the company's financial metrics will remain solidly
positioned within the current Baa2 rating category. At the same
time, Moody's points that a potential purchase of the company's
shares from ConocoPhillips over the course of 2010 and 2011, if
debt funded, might materially erode Lukoil's financial flexibility
currently imbedded in the rating though it appears as manageable within
the Baa2 category.
The stable rating outlook assumes that Lukoil will continue to operate
conservatively below its internal maximum leverage (unadjusted Debt/Debt
+ Equity) guidance of 30%. Based on its current business
risk profile, Moody's expects retained cash flow to net adjusted
debt to stay comfortably above 40%, in line with the company's
performance historically. Gradual risk diversification outside
Russia -- particularly in the upstream segment, where it could
reduce LUKOIL's geological and geopolitical concentration -- could
provide further upside to the ratings over time. However,
such developments are likely to evolve gradually and are not imminent.
Given the resulting element of shared economic risk between Russia and
Lukoil, Moody's considers that Lukoil's ratings have a degree of
correlation to those of the Russian state.
Lukoil's ratings could come under negative pressure in the event
of (1) a sustained failure to achieve targeted production growth and full
reserve replacement; as well as (2) a sharp deterioration of Lukoil's
operating environment, as evidenced by license or tax disputes or
competition with state-owned peers on gravely uncompetitive terms.
Acquisitions or shareholder returns (incl. share buybacks) that
significantly impair Lukoil's financial profile -- with leverage
moving towards or above 30%, or retained cash flow to net
adjusted debt weakening towards the 40% level -- would also
exert pressure on the ratings. Moody's will closely monitor
the credit implications of further share buy-backs that Lukoil
may pursue during 2011, especially in conjunction with significant
capex and debt service requirements expected for 2011.
According to Moody's, any upside to Lukoil's ratings is limited
at present, given its high country and field concentration.
Over time, a greater diversification and further build-up
of its international presence, particularly in the upstream segment,
could strengthen Lukoil's credit profile and thus result in upgrades.
Moody's previous rating action on Lukoil was implemented on 26 October
2009, when the rating agency assigned (P)Baa2 ratings with a stable
outlook to a previous Lukoil Eurobond issue.
The principal methodology used in rating OAO Lukoil was Global Integrated
Oil & Gas Industry rating methodology published in November 2009.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
OAO LUKOIL ("LUKOIL"), rated Baa2 with a stable outlook,
is Russia's largest vertically integrated oil & gas company
by reserves, and one of the largest oil & gas companies globally.
In 2009, the company generated total revenues of USD68 billion.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
David G. Staples
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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Moody's Eastern Europe LLC
Moody's assigns (P)Baa2 rating to Lukoil's Eurobond issue
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