Moody’s Investors Service has today upgraded Russian integrated oil company OJSC Bashneft’s (Bashneft) corporate family rating (CFR) to Ba1 from Ba2 and its probability of default rating (PDR) to Ba1-PD from Ba2-PD, following the rating agency’s decision to assign the company government related issuer (GRI) status after the company was taken into government ownership on 8 December 2014. The outlook on the ratings is negative. Moody’s Interfax Rating Agency has also upgraded to Aa1.ru from Aa2.ru the national scale corporate family rating (NSR) of Bashneft. Moody’s Interfax is majority-owned by Moody’s Investors Service (MIS).
This concludes the review initiated by Moody’s on 23 December 2014 when the agency placed 45 Russian non-financial corporate ratings on review for downgrade, reflecting the rapid deterioration in the operating environment in Russia.
Today’s rating action primarily reflects Bashneft’s reclassification to GRI status following changes to its ownership structure, whereby the Government of Russia (Ba1 negative) now holds a 75% stake. Over the course of 2015, the Russian government will transfer an approximate 25% stake in Bashneft to the Republic of Bashkortostan (Ba2 negative) custodianship, leaving the Russian Federal government with the controlling (approximately 50%) stake in the company.
Based on Bashneft’s new ownership structure, Moody’s has applied its GRI rating methodology to determine its rating. The Ba1 CFR incorporates (1) the baseline credit assessment (BCA), which indicates the company’s standalone credit strength, of ba2; (2) the foreign-currency debt rating of the support provider (i.e., the Russian government) of Ba1 with negative outlook; (3) the high default dependence between Bashneft and the government; and (4) the strong probability of government support in the event of distress.
Moody’s assesses the probability of the governmental support in the event of distress as strong, taking into account (1) the government’s (both at the federal and the regional levels) ownership of the company; (2) Bashneft’s operations in the strategically important oil and gas sector; (3) the significant involvement of the government in the shaping of the company’s strategy reflected in its board of directors composition (3 of 9 members of the board are appointed by the state); and (4) the company’s economic and social importance for the Republic of Bashkortostan.
Moody’s assesses government default dependence as «high» for Bashneft because it operates in the oil and gas sector, which is critically important for the Russian government as it accounts for approximately half of the country’s budget revenues and approximately 20% of its GDP.
Bashneft’s BCA of ba2 positively reflects (1) its strong vertical integration; (2) relatively robust operating, financial and cash flow financial metrics; (3) low production costs; and (4) positive production dynamics (in 2014, the company’s oil output increased by 11%).
The rating is constrained by (1) Bashneft’s relatively modest scale of operations compared to its Russian peers; (2) high concentration of reserves in the mature provinces of Bashkortostan; (3) the company’s operations being concentrated in Russia with its developing regulatory and taxation regime and geopolitical pressures.
Alongside incorporating potential government support in the company’s rating, Moody’s notes improvement in the predictability of Bashneft’s previously shareholder-oriented dividend policy. As a state-owned entity, Bashneft will now pay at least 25% of its net profit for the year as dividends, and commit to certain social responsibilities in Bashkortostan, which Moody’s deems to be relatively modest.
Bashneft’ liquidity profile is solid. Moody’s expects that the impact of lower oil prices on the operating cash flow will be largely offset by the weakened ruble exchange rate. Coupled with cash balance of $950 million as of 31 December 2014 and committed credit facilities of $850 million, this will be sufficient to cover maintenance capex and investments in the new oilfields’ development, as well as debt repayments during the next 18 months.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook on Bashneft is in line with the negative outlook for Russia’s sovereign rating and reflects the fact that a further downgrade of Russia’s sovereign rating may result in the further lowering of the country ceiling for foreign-currency debt and, as a result, lead to a downgrade of the company’s rating.
WHAT COULD CHANGE THE RATING UP/DOWN
Bashneft’s rating is currently positioned at the level of Russia’s sovereign bond rating and ceiling for foreign-currency debt. However, a positive development at the sovereign rating level might not necessarily impact Bashneft’s rating, given its weaker standalone credit profile relative to its Russian peers.
Negative rating pressure will develop if (1) leverage, as measured by Moody’s adjusted net debt/EBITDA, exceeds 2.0x on a sustained basis; and (2) the company’s liquidity profile deteriorates; (3) there is a further downgrade of Russia’s sovereign rating and/or a lowering of the country ceiling for foreign-currency debt. A reduction in the level of state ownership of Bashneft would cause Moody’s to reassess its GRI assumptions for the company and could also have a negative impact on its rating.
The principal methodology used in these ratings was the Global Integrated Oil & Gas Industry published in April 2014. Other methodology used is the Government-Related Issuers methodology published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.