Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed JSC Uzbekneftegaz’s (UNG) Long-Term Issuer Default Rating (IDR) at ‘BB-’ with a Stable Outlook.

UNG’s rating is equalised with that of its parent Uzbekistan (BB-/Stable). UNG is a fully state-owned integrated natural gas and liquid hydrocarbons producer with strong links with the government.

UNG’s ‘b+’ Standalone Credit Profile (SCP) remains under pressure from high leverage. We expect its leverage to improve as its gas-to-liquids (GTL) plant is now operational and will start to significantly contribute to UNG’s earnings from 2023. The ‘b+’ SCP also reflects UNG’s medium-scale production, integration into downstream activities, low-cost position and limitations of the general operating environment in Uzbekistan.

‘Very Strong’ Support: UNG’s rating is equalised with Uzbekistan’s due to strong ties under our Government-Related Entities (GRE) Rating Criteria. We view the status, ownership and control factor as ‘Strong’ as the as the state is UNG’s sole ordinary shareholder, although it has been considering selling a minority stake in UNG to outside investors.

We view the support record as ‘Very Strong’ because around 65% of its consolidated debt was guaranteed by the state at end-2022. However, we expect the share of guaranteed debt to gradually decline. Other forms of support include liberalised oil product prices charged by UNG, selected tax incentives and reduced dividends.

‘Very Strong’ Socio-Political Impact: We view the socio-political impact of UNG’s default as ‘Very Strong’ because the company is focused on providing gas and liquid hydrocarbons to domestic utilities, industry and the private sector, and does not export gas. Uzbekistan is reliant on gas for power generation, heating and as automobile fuel. UNG is one of the largest companies and employers in the country. We assess financial implications of its default as ‘Strong’ as UNG is a large borrower, hence deemed a proxy issuer for the government, but UNG’s debt is substantially smaller than that of the government.

SCP Remains Under Pressure: UNG’s ‘b+’ SCP reflects the company’s medium scale, regulated gas prices, very low upstream costs and integration into chemicals and refining, which are offset by high leverage, tight liquidity and a weak domestic operating environment. The SCP is under pressure, primarily from high leverage, mostly in view of the company’s delayed start-up of its GTL plant. We understand from management that the GTL plant has largely ramped up now, and should start to significantly contribute to UNG’s earnings starting from 2023.

Liberalisation Supports Revenue: UNG has benefited from the 2020 abolition of regulated prices for condensate, oil and oil products through higher revenue. Uzbekistan is planning to liberalise prices for natural gas, first increasing prices for industrial customers (in 2023) and later for households (potentially in 2024). This could boost UNG’s profitability if the collectability of receivables does not deteriorate. We conservatively assume only a moderate increase in UNG’s natural gas prices.

Gradually Falling Leverage: Our forecasts show the company’s EBITDA net leverage declining from 5x in 2022 to around 3.7-3.8x in 2023-2024, and around 3.2x in 2025-2026. Deleveraging will mostly be driven by completing the ramp-up in production of its GTL project as well as a USD800 million injection from the Air Products deal.

Legacy Guarantees: UNG had UZS13 trillion of guarantees at end-2022, mainly issued to its former subsidiary JSC Uztransgaz for its gas purchases. We view these liabilities as part of the legacy from the previous group structure. UNG transferred its stake in Uztransgaz to the state in 2019. According to the company, any upcoming liabilities from Uztransgaz will be covered with state support without recourse to UNG. We do not add this guaranteed debt to UNG’s total debt.

Medium Scale: UNG’s consolidated hydrocarbon output was 539 thousand barrels of oil equivalent per day in 2022. However, its per-barrel profitability is fairly weak in view of regulated domestic gas prices. Raw natural gas accounted for almost all of UNG’s production. Its PRMS 1P reserve life was 12.5 years at end-2022, which we view as adequate. UNG’s low regulated realised natural gas prices were counterbalanced by its downstream integration and low upstream costs, resulting in funds from operations of around USD550 million in 2022.

The strength of UNG’s ties with the government under Fitch’s GRE Rating Criteria is comparable with QatarEnergy’s (AA-/Positive), and slightly greater than OQ S.A.O.C.’s (OQ; BB/Positive) and JSC National Company KazMunayGas’s (KMG; BBB/Stable). UNG’s ‘b+’ SCP is on a par with State Oil Company of the Azerbaijan Republic’s (SOCAR; BB+/Positive).

Fitch assesses all five companies under its GRE Rating Criteria. UNG’s, NC KMG’s and SOCAR’s ratings are equalised with their respective sovereigns. QatarEnergy’s and OQ’s ratings are constrained by their sovereigns.