Uzbekneftegaz JSC rated ‘BB-’; Outlook Stable
22/10/2021 11:50
Uzbekneftegaz JSC rated ‘BB-’; Outlook Stable
22/10/2021 11:50
Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings assigned Uzbekistan’s national integrated oil and gas producer Uzbekneftegaz ‘BB-’ rating. The outlook is stable.
The ‘BB-’ rating balances Uzbekneftegaz’s moderate size, low profitability, and currently high leverage with stability of its cash flows, deleveraging prospects and state support.
Uzbekneftegaz is a midsize integrated energy producer with large exposure to gas, which the company mostly supplies to the domestic market at regulated prices. The prices, currently fixed at about US$34 per thousand cubic meters (/kcm), limit cash flow generation and result in weak profitability, but ensure lower volatility than most of its peers. The rating captures Uzbekneftegaz’s relatively high leverage due to significant capital investments, but also accounts for the potential improvement in credit metrics as these large projects ramp up. Finally, it reflects our expectation of an extremely high likelihood of government support based on the company’s critical role for the local economy and significant share of the debt being state-guaranteed.
Uzbekneftegaz’s leverage will gradually decline, despite sizable capital investments in the coming years, as GTL becomes fully operational in 2022 and contributes to EBITDA growth.
Uzbekneftegaz plans a significant capex program of US$1.8 billion to expand the Shurtan gas chemical complex (GCC), to produce up to 400,000 metric tons (mt) of polyethylene and 100,000 mt of polypropylene and adding as much as US$200 million of EBITDA with an estimated start in 2024. This will lead to negative discretionary cash flow generation and debt accumulation in the next few years. However, this will be offset by the EBITDA growth toward US$1.3 billion by 2023 from US$900 million forecast in 2021, primarily driven by the EBITDA contribution from GTL, which we expect to ramp up toward the end of 2021. The US$3.6 billion plant will convert low cost gas into value-added products such as diesel, naphtha, and jet fuel, providing substitutes for those products that are currently imported in the domestic market. As a result, we expect FFO to debt to improve to 18% from 13% by 2023.
We do not factor in our rating the potential liberalization of the domestic gas market, which could lead to significant improvement in credit metrics, because the timing of the reform is still to be clarified.
We understand that Uzbekistan’s government plans to revise fixed gas tariffs to a more competitive level, which could significantly improve the company’s cash generation and profitability, while almost doubling EBITDA. However, until the timing and major steps of the reform are clear, we will not include it in our base-case forecast. Moreover, we will require a certain track record of performance under the new tariff system to ensure the domestic economy is capable of bearing increased costs and that payment collection does not deteriorate. We would also review the group’s financials and dividends in such a case, as the group’s capacity for investments and dividends would increase.
Uzbekneftegaz’s low profitability and asset concentration in high-country-risk Uzbekistan are somewhat offset by its sizable, low-cost production and fixed gas tariffs.
Uzbekneftegaz is a national oil and gas producer with assets concentrated in Uzbekistan, producing 36 billion cm of gas as of 2020 and extracting 67% of the country’s gas. We see the company’s production scale of about 540,000 barrels of oil equivalent per day (boepd) in 2020 as in line with national producers in the region, like KMG NC (BB/Negative) with 485,000 boepd or PTT Exploration and Production (BBB+/Stable) with 354,000 boepd. However, for a comparable production level, Uzbekneftegaz generates about US$1 billion EBITDA , which is 3x lower than that of KMG NC. This is because 85% of EBITDA is generated from gas sales, which are realized domestically at a low fixed tariffs. The company sells gas for about US$34/kcm, which is lower than domestic prices in Russia of about US$60/kcm. or the regional export price of about US$100/kcm. This translates into weaker profitability, but results in significantly lower volatility compared with peers. We further note a good reserve base that ensures at least 11 years of production and high quality of reserves. As per our estimates, Uzbekneftegaz benefits from low cost of gas production of about US$8/kcm-US$9/kcm, comparable with US$6/kcm at another cost leader, Gazprom. Moreover, the rating assessment reflects the general risks associated with operations in Uzbekistan.
The company’s exposure to foreign-exchange (FX) risk will reduce with the GTL refinery launch and Shurtan GCC expansion.
Uzbekneftegaz currently generates almost no revenue from export operations, selling gas and refined products domestically in local currency. However, in 2020 Uzbekistan’s government liberalized refined product prices, which are now linked to global oil prices. The GTL launch should significantly increase the share of revenue linked to U.S. dollars, with the refining segment’s EBITDA contribution increasing to up to 40% from 6% in 2020 as the refinery fully ramps up. This will further improve with expansion of the Shurtan GCC with an estimated start in 2024, because most of the chemicals will be exported. The increasing share of revenue linked to hard currency should significantly reduce the company’s existing exposure to FX risk, because 90% of debt is denominated in U.S. dollars. Any further devaluation of the local currency would only support the company’s cost position.
Our assessment of an extremely high likelihood of extraordinary state support reflects the company’s critical role to the domestic economy, but does not lead to automatic rating alignment.
Uzbekneftegaz supplies a large share of gas and refined products to the domestic economy and realizes gas at significantly lower prices than regional peers, ensuring affordable consumption and cheap input for the industrial sector. We positively note a track record of support, including a US$1.7 billion recapitalization in 2020, liberalization of oil product prices, and a guarantee provision for about 80% of debt, which is the highest proportion among all national oil companies that we rate. In our base case, we don’t forecast the government will meaningfully reduce its stake in Uzbekneftegaz from the current 99.94% in the near term and expect it will continue to fully control the company’s strategy through its board representation. At the same time, our assessment is limited by the government’s longer-term plans to further liberalize the gas market and transform the state-owned company to a competitive and more independent gas producer.
The stable outlook on Uzbekneftegaz reflects our expectation that the company will secure financing for its large capex program and successfully ramp up the GTL plant with no material cost overruns or delays. In our base case, a successful GTL launch should support the company’s metrics, and FFO to debt should remain at about 13% in 2021, gradually rising to 15%-18% by 2023. We also expect no changes in gas tariff regulation, ensuring stable cash generation from the gas sales.
The rating on Uzbekneftegaz is capped by the sovereign rating on Uzbekistan.
Rating upside would be possible through a combination of a sovereign upgrade and a stronger stand-alone credit profile (SACP). However, SACP upside is limited in the near term under current gas tariff regulation and our expectation that leverage will remain high in the coming years as the expansion program progresses. An upward revision of gas tariffs could therefore be an important driver for a stronger SACP, but only if combined with a commitment to maintain lower leverage through the cycle.
25/04/2024Read more
$ 1 | 12697.00 | 0.000% |
1 | 13547.70 | 0.000% |
₽ 1 | 135.05 | 0.000% |