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Rating Action:

Moody's assigns first-time B1 rating to C.A.T.oil AG

Global Credit Research - 07 Mar 2008
Moody's assigns first-time B1 rating to C.A.T.oil AG

Moscow, March 07, 2008 -- Moody's Investors Service (Moody's) assigned a B1 corporate family rating (CFR), to C.A.T.oil AG ("CAToil"). The outlook is stable.

CAToil is an independent niche oilfield services ("OFS") company organised in the form of an Austria-based holding company which wholly owns five main operating subsidiaries in Russia. The company is a niche player in the overall OFS market, with strong positioning in fracturing, sidetracking and workover services which the company provides to the major oil and gas companies in Russia and Kazakhstan.

CAToil is a publicly traded company with 40% of shares held by institutional investors through an IPO which the company completed in 2006 placing its shares on the FSE. The remaining 60% are privately held by two founders. CAToil's market capitalisation is around USD 1.0 billion. In 2006 CAToil generated sales of EUR 194 million. It has a workforce of 3,200 people the majority of whom are located in Russia and Kazakhstan.

CAToil's rating is based on Moody's Global Oilfield Services Industry Rating Methodology, which assesses the company's financial and operational performance for the past three historical years (2005-2007) and also takes into account CAToil's two year forecast (2008-2009). The methodology rating assessment maps the company into a Baa3 category and is driven by the company's robust financial metrics, underpinned by strong profitability and historically low leverage. The forward looking assessment which is factored into the rating, reflects the CAToil's ongoing efforts to diversify its product portfolio aimed at further development of its sidetracking operations and diversification into the conventional drilling and seismic segments of OFS market in the respective regions. The company's pro forma Debt/Total Capitalisation ratio assumes debt issuance this year resulting in a ratio score in the "Ba" category.

The actual rating of B1 is therefore four notches lower than the rating indicated by the methodology grid, which is in line with the rating discount bracket applied by Moody's to companies operating in the region characterised by evolving and challenging political, regulatory and operational environment. The rating is constrained by (i) the company's small size in the context of the overall OFS market in the region, which is becoming increasingly attractive for major global players, (ii) its fairly concentrated customer base, (iii) CAToil's strong, albeit decreasing, dependence on a single product line (fracturing operations), (iv) the event risk related to the implementation of a large scale capex programme and (v) a significant step up in leverage following the planned debt issuance.

At the same time Moody's recognises a significant upside potential offered by the current market environment in the respective region, the company's strong financial profile, well-established customer relationships and regional expertise. The rating also benefits from certain risk-mitigating characteristics of the Russian OFS market, as well as the company-specific qualities, namely: (i) a low correlation between the demand for OFS and the oil price due to the nature of the Russian taxation system (ii) a lower susceptibility of OFS companies to political risks, compared to exploration and production oil&gas players globally, (iii) significant upside potential for OFS segment in Russia and Kazakhstan due to historic underinvestment, (iv) the company's experienced management team and (v) proven commitment of CAToil's management and its key founder to adhere to a western-type corporate governance standards and conservative financial policies.

The stable outlook is supported by Moody's expectation that market conditions will remain supportive and the company will pursue the execution of its capex programme as planned. The stable outlook also reflects Moody's expectation that CAToil will maintain its current strategy and financial policies.

As the company's focus is on organic growth, Moody's does not factor in any sizable acquisitions in the current rating. Nevertheless, in the event CAToil decides to pursue an acquisition opportunity, Moody's would expect that the strategic fit, valuation and incremental leverage would be carefully examined and consistent with the management's disciplined historical standards and that Debt/Book Capitalisation would not exceed 40% as a result of the acquisition.

The rating might experience a positive pressure if CAToil were to realise its capex and revenue growth objectives in the next 12-18 months while maintaining the healthy level of profitability and returns. To support a rating upgrade, Moody's would also expect CAToil to continue strengthening its revenue base through product diversification and strong order book while illustrating its ability to withstand competitive pressure and preserve margins.

Ratings could be pressured if CAToil were to materially increase its leverage above the expected levels, either through more aggressive debt financed capex, or due to lower profitability. Going forward Debt/EBITDA and Debt/Capitalization greater than 3x and 45% in upcycle conditions could result in a negative outlook or ratings downgrade. Also, a deterioration of the company's operational performance resulting from a loss of a major customer, and/or a deterioration in E&P activity that might have a negative impact on CAToil's business fundamentals and put significant pressure on CAToil's market position and cash flow generation capacity, could result in a negative outlook or ratings downgrade.

C.A.T. oil AG, which is headquartered in Vienna, Austria, and operates through its several subsidiaries in Russia, is a provider of oil-field services to the major oil&gas players in Russia and Kazakhstan. The company generated revenue of EUR 194 million in 2006.

London
Stuart Lawton
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moscow
Victoria Maisuradze
Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe
Telephone: +7 495 641-1881
Facsimile: +7 495 641-1897

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