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Rating Action:

Moody's changes the outlook on CEPSA to negative; affirms Baa3 ratings

07 Apr 2020

Frankfurt am Main, April 07, 2020 -- Moody's has today changed the outlook on Compania Espanola de Petroleos, S.A. (CEPSA) and CEPSA Finance, S.A.U. to negative from stable. Concurrently Moody's has affirmed CEPSA's Baa3 long term issuer rating as well as the Baa3 bonds issued by CEPSA Finance, S.A.U.

The full list of all affected entities and ratings is included in the end of the press release.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The oil and gas sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment, which comes at times when many oil and gas companies are committed to spending relatively sizeable amounts to reach their long-term carbon transition targets. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on CEPSA of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

The negative outlook on CEPSA reflects currently significant uncertainty with regards to the degree of the deterioration of the economic environment in both upstream and downstream businesses of CEPSA as well as the speed of recovery. This uncertainty implies an increased risk that in the next 12-18 months CEPSA will not be able to sustain credit metrics commensurate with a Baa3 rating, such as retained cash flow (RCF)/net debt above 25%. CEPSA reported 24% in 2019, or in high twenties in % terms pro-forma for the effects related to the sale of 38.5% stake to the funds managed by Carlyle. This metric was largely in line with Moody's expectation and positioned CEPSA adequately in Baa3 category before the start of the coronavirus pandemic.

Moody's believes that in 2020 the company's earnings and cash flows across all of its businesses will meaningfully decline. CEPSA's upstream earnings will suffer from significantly lower oil prices, which on the wake of coronavirus pandemics and with a price war in the industry plummeted in March 2020 below $30/bbl. Moody's believes that there is a risk that the oil prices will not return to the agency's fundamental medium-term price range of $50-$70/bbl (WTI) before 2022. Moody's base case is based on the assumption that the average oil prices will remain low at around $40/bbl in 2020, progressively improving towards $50/bbl in 2021.

In addition, despite benefitting from significantly cheaper feedstock, in 2020 CEPSA's downstream businesses will not provide the usual offsetting effect, given the pressure on demand for a number of refined and petrochemical products driven by worsened economic conditions and current lockdowns in many countries in the world, for CEPSA specifically in Spain.

The affirmation of CEPSA's Baa3 ratings reflect Moody's expectation that CEPSA will be willing and able to significantly cut its operating expenses and capital spending to protect its cash flows. In addition, Moody's understands that dividend cuts could be also considered, even though one of the two shareholders, funds managed by Carlyle, is to a certain degree reliant on dividends from CEPSA. This is because Carlyle's funds have financed the purchase of its 38.5% stake in CEPSA with debt that sits in a holding entity above CEPSA and has no meaningful cash flows other than dividends from CEPSA. However, Moody's also understands that both shareholders are committed to protect an investment grade rating, including a commitment to keep net leverage below 2.0x (1.4x in 2019), which gives Moody's a degree of comfort that CEPSA will be willing and able to take necessary actions, if needed, and which also supports today's affirmation.

Moody's deems CEPSA 's liquidity as good. As of the end of 2019 the company reported around €560 million cash and cash equivalents, supported by undrawn committed credit facilities totaling €2.5 billion, without MAC clauses. CEPSA's maturity profile is well spread, with no meaningful debt maturities until 2024.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Negative rating pressure could develop if there are indications of more aggressive financial policy, weakening of the business profile in the currently challenging environment, leading to retained cash flow/net debt sustainably below 25%. A weakened liquidity could also lead to a downgrade.

An upgrade of CEPSA's Baa3 rating would require strengthening of the upstream segment with daily net entitlement production growing towards 100 Mboe/d and resilience of the downstream segments. It would also require sustainable free cash flow generation, with RCF/net debt rising to around 40%.

LIST OF AFFECTED RATINGS:

..Issuer: Compania Espanola de Petroleos, S.A.

Affirmation:

.... LT Issuer Rating, Affirmed Baa3

Outlook Actions:

....Outlook, Changed To Negative From Stable

..Issuer: CEPSA Finance, S.A.U.

Affirmations:

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

....Outlook, Changed To Negative From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Integrated Oil and Gas Methodology published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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 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 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 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

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.

Martin Fujerik
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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