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Global Credit Research - 02 Aug 2010
Approximately US$740 million of rated debt securities affected
New York, August 02, 2010 -- Moody's Investors Service affirmed Empresa Nacional del Petróleo's
(ENAP) A3 foreign currency bond rating and changed the rating outlook
to negative from stable. The negative outlook reflects ENAP's
high financial leverage.
ENAP's elevated financial leverage stems from weak profitability
and cash flow generation, high ongoing capital spending and substantial
working capital usage. ENAP's debt to EBITDA (as adjusted
for Moody's standard adjustments) was approximately 7.7x
over the last twelve months ending March 31, 2010. Moody's
notes that ENAP's EBITDA in the first quarter of 2010 was negatively
impacted by the massive earthquake Chile experienced on February 27,
2010 and that the company increased short term debt balances in order
to increase liquidity and fund high working capital needs. Nevertheless,
even assuming a more normalized EBITDA and net debt balances, ENAP's
financial leverage is in a range (above 6x) that Moody's considers
high for its baseline credit assessment.
Moody's remains concerned that ENAP has limited opportunities to
reduce debt given expected continued levels of high capital spending over
the near to medium term and our expectation that refining margins will
likely remain below mid-cycle averages. As such, sizable
debt reduction without a capital infusion from the government will be
difficult. We note that ENAP's capital spending program should
benefit the company's results; however, we remain concerned
that earnings and cash flows will not increase sufficiently relative to
debt levels and that debt could risk facing further increases due to expectations
of, at best, breakeven levels of free cash flow.
The A3 rating affirmation recognizes that ENAP was successful in generating
earnings in 2009 that reflected a substantial improvement from very weak
2008 levels, and were of particular note given the low refining
margin environment and the relatively weaker results of several of its
peers. In addition, the company appears to have recovered
from the earthquake, which damaged its two largest refineries,
in a fairly timely manner and without substantial cost to ENAP.
Furthermore, management has continued to undertake a number of steps
in order to improve ENAP's profitability levels, including
increasing ENAP's crude distillation and conversion capacity, cost
reduction efforts and improved working capital management.
If ENAP is unable to meaningfully strengthen its financial profile through
improved profitability levels or leverage reduction by year-end
2010, its baseline credit assessment could be lowered, resulting
in a downgrade of its A3 foreign currency rating. On the other
hand, a demonstrated improvement in ENAP's financial leverage
(debt to EBITDA below 4x) could result in the rating outlook being stabilized.
The negative outlook on ENAP's A3 foreign currency ratings is based
on the possibility that Moody's could lower ENAP's underlying
baseline credit assessment. Since ENAP is 100% owned by
the Chilean state, ENAP's A3 foreign currency rating reflects
the application of Moody's joint default rating methodology for
government-related issuers (GRIs). The A3 rating combines:
(i) ENAP's underlying baseline credit assessment, and (ii)
the willingness and ability of the government of Chile to provide credit
support to ENAP in a distress situation. Moody's ranks ENAP's
underlying baseline credit assessment in the range of 11-13 (mapping
to the Ba1-Ba3 range). The Chilean government's ability
to provide support to ENAP is measured by its Aa3 local currency rating
and stable outlook, weakened somewhat by the medium dependence of
the government and the company on credit factors that could cause stress
on both simultaneously. Moody's considers the government's
willingness to support the company as high, considering the strategic
importance of ENAP to the Chilean economy, ENAP's 100%
ownership by the state, and the government's involvement in
the company's budget approval and other policy-related processes.
The last rating action on ENAP was on June 30, 2009, at which
time Moody's affirmed the company's ratings.
The principal methodologies used in rating ENAP were Moody's Global Independent
Refining and Marketing Industry rating methodology published in December
2009 and Government-Related Issuers: Methodology Update published
in July 2010, both of which can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating ENAP can also be found in the the
Rating Methodologies sub-directory on Moody's website.
Empresa Nacional del Petróleo is Chile's national oil company.
It is headquartered in Santiago, Chile.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's changes Empresa Nacional del Petroleo's (ENAP) rating outlook to negative
250 Greenwich Street
New York, NY 10007
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