London, 28 April 2020 -- Moody's Investors Service (Moody's) has today downgraded RussNeft
PJSC's (RussNeft) corporate family rating (CFR) to Caa1 from B1
and probability of default rating (PDR) to Caa1-PD from B1-PD.
RussNeft's outlook has been changed to negative from rating under
review. This concludes the review for downgrade initiated by Moody's
on 13 March 2020.
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, and oil prices.
More specifically, the weaknesses in RussNeft's credit profile
have left it vulnerable to shifts in market sentiment in these unprecedented
operating conditions and RussNeft remains vulnerable to the outbreak continuing
to spread, and oil prices remaining low. We regard the coronavirus
outbreak as a social risk under our ESG framework, given the substantial
implications for public health and safety. Today's action
reflects the impact on RussNeft of the breadth and severity of the shock,
and the broad deterioration in credit quality it has triggered,
with a backdrop of weak liquidity.
The downgrade of RussNeft's rating to Caa1 with a negative outlook
reflects (1) RussNeft's weak liquidity, which has been amplified
by the severe drop in oil prices and aggressive liquidity management,
both of which have materially increased the probability of default in
the current oil price environment; (2) Moody's expectation
that the company's credit metrics will materially deteriorate over
the next 12-18 months because of the continuing drop in oil prices
and anticipated production cuts under the new OPEC+ agreement,
with limited potential for recovery over the following 12-18 months;
and (3) the company's elevated corporate governance risks stemming
from substantial related-party transactions with other businesses
of the Gutseriev family which controls 46.5% of RussNeft's
voting shares.
As of 31 December 2019, RussNeft's liquidity comprised cash
and cash equivalents of RUB3.0 billion, and operating cash
flow of below RUB10 billion which Moody's expects the company to
generate over the next 12 months assuming the average oil price for 2020
at $25 per barrel of Urals. This liquidity will be insufficient
to cover the company's debt maturities of RUB7.2 billion (including
lease payments) over the same period, capital spending which Moody's
estimates at up to RUB19 billion and dividend payouts of at least $60
million on the company's preferred shares, as anticipated
by its dividend policy.
RussNeft's borrowings mostly comprise a loan from Bank VTB,
PJSC (VTB, Baa3 stable), which represents around 92%
of the company's debt portfolio. RussNeft is to repay the
outstanding $1.17 billion loan in quarterly instalments
totalling $91 million per year in 2020-25 and a $625
million final payment in 2026.
Moody's expects that in 2020 RussNeft's leverage will increase
to 8.0x total debt/EBITDA from 3.2x as of year-end
2019; retained cash flow (RCF)/debt will decline below 5%
from 24.5%; and EBITDA/interest expense will decline
to 3.0x from 6.0x (all metrics are Moody's-adjusted,
with Moody's-adjusted debt including a RUB20 billion obligation
under a forward contract to purchase RussNeft's shares from VTB
signed in late 2019, and around RUB53 billion of financial guarantees
issued for related parties). This deterioration in credit metrics
will be driven by the imminent decline in EBITDA and operating cash flow
because of the drop in oil prices and production cuts under the OPEC+
agreement, along with the likely increase in debt to cover the cash
burn. Moody's views the potential for recovery in the company's
leverage and RCF/debt in 2021 as limited, as long as its adjusted
debt remains inflated by obligations attributed to related-party
transactions.
Moody's expects RussNeft's post-dividend FCF to be
negative in 2020, driven by high capital spending and committed
dividend payouts on preferred shares, which are denominated in US
dollar and therefore will increase in rouble terms (the company's
reporting currency), amid lower operating cash flow. In 2019,
RussNeft updated its dividend policy which now anticipates payouts of
at least $60 million per year on its preferred shares, up
from $40 million earlier.
RussNeft's rating also factors in (1) amortisation of the company's
loans and received prepayments under oil supply contracts, and significant
interest expenses; (2) its significant related-party transactions
and risks related to its concentrated ownership structure; and (3)
the sensitivity of the company's financial metrics to the volatility
in oil prices and the rouble exchange rate.
RussNeft's rating takes into account the company's (1) sizeable
reserves and sustainable hydrocarbon production absent the OPEC+
restrictions; and (2) historically moderate leverage, robust
cash flow metrics and positive free cash flow, although all these
will deteriorate on low oil prices and production cuts.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
RussNeft is exposed to carbon transition risk in the long term.
Oil demand could peak in the next 10-15 years, well before
natural gas, which has a central role in the energy transition of
power generation away from carbon. The company has a low share
of gas in its production and reserves.
Corporate governance risks stem from the company's concentrated ownership
structure and substantial related-party transactions, which
frequently lack transparency and clear economic rationale. RussNeft's
key shareholders are the Gutseriev family (46.5% of voting
shares) and Glencore plc (Baa1 stable, 33% of voting shares),
with around 20% of ordinary shares in free float on the Moscow
Exchange.
RussNeft occasionally provides guarantees for related-party oil
supply contracts and borrowings, including those related to the
M&A activity of other businesses of the Gutseriev family. As
of year-end 2019, RussNeft had RUB60 billion of guarantees
issued for and to non-consolidated related parties, which
represented 37% of its Moody's-adjusted debt.
In H2 2019, RussNeft's subsidiary Russneft Cyprus Limited
signed a long-term forward contract with Business Finance LLC,
an affiliate of VTB, to purchase RussNeft's 33.2 million
preference shares which Business Finance LLC acquired earlier in the same
period, in 2026 for RUB21 billion. In the same period,
RussNeft provided a RUB23 billion financial guarantee to Business Finance
LLC for Miraholl Holdings Limited, an entity controlled by the Gutseriev
family, and a RUB13.5 billion short-term loan to an
undisclosed third party, without disclosing details and economic
rationale of these transactions.
As of 31 December 2019, RussNeft had a RUB51 billion outstanding
balance of legacy loans provided to its related parties, companies
of the GEA Group, through which RussNeft participates in oil exploration
and production projects in the Republic of Azerbaijan. RussNeft
consolidated these loans at the time of the acquisition of significant
influence over the GEA Group from a related party in 2014 for $870
million, including cash payment of $9 million. The
GEA Group currently does not generate cash flows sufficient to repay these
loans.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative rating outlook reflects uncertainty over RussNeft's
ability to materially improve its liquidity in the short term, further
elevating the probability of default under its bank debt.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of RussNeft's rating is unlikely over the next 12-18
months, given the negative outlook. Over time, Moody's
could upgrade the rating if the company (1) materially improves its liquidity
and liquidity management; (2) improves its corporate governance practices
and curtails its loans to and guarantees for related parties; (3)
improves public disclosure of its related party transactions; (4)
maintains its RCF/debt at or above 10%, debt/EBITDA below
5.0x and EBITDA/interest expense above 2.5x (all metrics
are Moody's-adjusted).
Moody's could downgrade RussNeft's rating if (1) the company fails
to improve its liquidity, increasing the probability of default
on its debt obligations, including in the form of debt restructuring
which Moody's could view as a distressed exchange, a form
of default; or (2) the company's RCF turns negative and EBITDA/interest
expense declines below 1.0x on a sustained basis.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Independent Exploration
and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Moscow, Russia, RussNeft PJSC (RussNeft)
is a medium-sized independent oil and gas producer, with
key upstream assets located in Western and Central Siberia, and
Volga-Urals. As of 31 December 2019, the company had
around 1,305 million barrels of oil equivalent (boe) of proved oil
and gas reserves in accordance with the Petroleum Resources Management
System classification. In 2019, RussNeft produced 7.1
million tonnes (mt) of crude oil and condensate (including 0.5
mt produced by companies of the GEA Group, which is not consolidated
by RussNeft) and 2.5 billion cubic meters (bcm) of gas.
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
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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 action(s)
announced and described above.
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Artem Frolov
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
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Russia
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Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
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