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Rating Action:

Moody's changes outlook on Rosneft's and RIHL's Baa1 ratings to stable from negative; affirms ratings

 The document has been translated in other languages

17 Dec 2013

$6.9 billion of rated debt affected

London, 17 December 2013 -- Moody's Investors Service has today changed the outlook on the Baa1 ratings of OJSC Oil Company Rosneft and its subsidiary Rosneft International Holdings Limited (RIHL) to stable from negative. Concurrently, Moody's has affirmed these ratings.

"We have stabilised the rating outlook because the liquidity profile of Rosneft and RIHL has strengthened in recent months. There is also increased visibility regarding how the group's forward-looking financial profile is now likely to evolve, which addresses the uncertainties that had contributed to the previous negative outlook," says Julia Pribytkova, a Moody's Vice President - Senior Analyst and lead analyst for Rosneft. "We now consider the company to be adequately positioned in its rating category, and do not expect its operating and/or credit metrics to deteriorate in the medium term."

RATINGS RATIONALE

Today's rating action reflects the strengthening of Rosneft's and its subsidiary RIHL's liquidity profile in recent months and the increased visibility regarding the likely evolution of the group's forward-looking financial profile. Moody's considers the group to be adequately positioned in its rating category and does not expect its operating and/or credit metrics to deteriorate in the medium term. This view is despite the significant increase in the group's overall leverage and the risks associated with integrating the former TNK-BP operations on a larger scale. In addition to the intrinsic strength of its business profile, Rosneft enjoys meaningful political support, which translates into Moody's final rating assessment of the company at the level of the Russian government, Baa1.

The Baa1 ratings are supported by Rosneft's strong business profile as the world's largest public oil company in terms of reserves and production. Given that it is controlled by the Russian state, Rosneft benefits from preferential access to oil & gas resources and lobbying power with the government, as well as established relationships with the state-owned banks. Moody's believes that Rosneft's partnership with BP, which now owns approximately 20% of the company, will positively contribute to increasing the former's operating efficiency, particularly in the upstream segment.

Moody's will treat as debt in economic substance Rosneft's potentially sizeable advances for oil deliveries under contracts with oil traders and China National Petroleum Corporation (CNPC, Aa3 stable), given (1) their significant scale; (2) their particularly long time horizon, which is unusual for working capital and trade financing; (3) the embedded financial cost; and (4) the absence of a production or price-risk-sharing mechanism between the parties to the underlying contracts. However, Moody's acknowledges certain non-debt characteristics that pertain to these obligations, namely (1) the flexible schedule of oil deliveries; (2) low envisaged probability of cash settlements, including for interest payments; and (3) the likelihood that these claims will rank at a similar level to those of trade creditors in the event of default. In view of the above, Moody's has widened the range of the standard rating guidance metrics for Rosneft compared to our guidance prior to having adjusted credit metrics for these obligations.

Moody's notes that in the fourth quarter of 2013 to the end of first quarter of 2015, Rosneft will face approximately $25 billion of debt maturities, primarily relating to short- and medium-term acquisition financing. The agency positively notes Rosneft's intention to use the proceeds of oil prepayments inter alia to finance upcoming financial debt maturities.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on the ratings of Rosneft and RIHL reflects Moody's expectation that Rosneft will maintain a solid operating profile and strong financial metrics. In particular, Moody's expects that Rosneft will maintain leverage, measured by Moody's-adjusted debt/EBITDA, below 4.0x and retained cash flow (RCF)/net debt above 20% on a sustainable basis. The ratings and the outlook do not take into account any material debt-funded acquisitions, which the rating agency would assess separately for their effect on the group's credit profile.

WHAT COULD CHANGE THE RATING UP/DOWN

Given that Rosneft's rating is at the same level as the sovereign rating of Russia, Moody's currently sees no upgrade potential for the company.

Negative rating pressure could develop if Rosneft's Moody's-adjusted debt/EBITDA is expected to exceed 4.0x and RCF/net debt to fall below 20% on a sustainable forward looking basis. Weakened liquidity, diminished support from the state, and/or meaningful unfavourable developments in the market environment could also exert downward pressure on the ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was the Global Integrated Oil & Gas Industry published in November 2009. Other methodologies used include the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

OJSC Oil Company Rosneft -- in which the Russian state holds a 69.5% share via its fully owned agent OAO Rosneftegaz (not rated) -- is Russia's largest integrated oil and gas company. Following its acquisition of TNK-BP (re-named Rosneft International Holdings Limited, or RIHL), Rosneft's proved oil and gas reserves as of 31 March 2013 amounted to 39.6 billion barrels of oil equivalent (boe), in accordance with Petroleum Resources Management System (PRMS). Rosneft's consolidated joint daily production reached 4.9 million barrels of oil equivalent (boe) in the third quarter of 2013. Consolidated refining capacity covers approximately half of the group's consolidated crude oil production. In the first nine months of 2013, Rosneft's consolidated revenue amounted to approximately $105.7 billion and its Moody's-adjusted EBITDA to around $17.4 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Julia Pribytkova
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia

David Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536

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Moody's changes outlook on Rosneft's and RIHL's Baa1 ratings to stable from negative; affirms ratings
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