Gazprom Neft is the fifth largest oil-producing and refining company in Russia with full vertical integration.

Standard & Poor’s has changed its “outlook” mark for Russia’s oil giant Gazprom Neft. The outlook was changed to stable from negative. The rating agency did not change its “BBB-” long-term corporate credit rating for the oil company, and reaffirmed the “ruAA+” Russia national scale rating that it assigned to Gazprom Neft previously.

Standard & Poor’s noted that the revision reflects the rating agency’s consideration that Gazprom Neft’s cash flow will allow the company to pay for its large acquisitions without creating any negative ramifications for liquidity or credit access. The rating agency now assesses the company’s liquidity as “adequate.” The rating agency also noted that its confidence in the performance of Gazprom Neft is strengthened by the commitment of the parent company Gazprom to intervene and help the oil company should such a need ever arise. 

The ratings of Standard & Poor’s are in line with the rating agency’s stand-alone credit profile for the company, which was set at “bb+.” Standard & Poor’s gives Gazprom Neft the extra mark because the company does have recourse to its parent company for possible support. Gazprom owns 96 percent of Gazprom Neft. The agency’s stand-alone credit rating denotes Gazprom Neft’s “fair” business risk profile and a “significant” financial risk profile.   

The rating agency’s analysts are also of the view that Gazprom’s leverage in relation to important corporate decisions and management activities is well balanced with the autonomy of Gazprom Neft’s operations and finances. As a holding company, Gazprom is very heavily gas-oriented. In the past, Gazprom Neft’s acquisitions were financed by the company’s own debt instruments and cash on hands.

At the same time, Standard & Poor’s considers the company’s policy of acquiring new assets as risky. On the bright side, Standard & Poor’s does recognize that the latest acquisitions, including the ongoing acquisition of Orenburg Neft from the parent company, are bound to strengthen the company’s overall business profile. New reserves are expected to compensate for the decline at older fields that are currently in operation.  

According to the agency, the stable outlook rating is a testament to the company’s strong and steady business development that is proceeding against a backdrop of increasing oil prices. The solid performance, Standard & Poor’s expects, will allow Gazprom Neft to digest its acquisitions of Severenergia and Sibir Energy without increasing its debt load significantly. 

Standard & Poor’s also does not think that the company’s credit metrics will change. Economic models show that the company’s adjusted debt will be only around USD 6 billion by the end of 2010. The ratio of funds from operation to adjusted debt will be more than 80 percent, while the ratio of adjusted debt to EBITDA will be around 1. The rating assigned to Gazprom Neft allows for the funds from operation to adjusted debt ratio to be more than 50 percent and for the adjusted debt to EBITDA ratio to be at around 1.5. Under the medium-term oil price forecast, where the price per barrel is calculated at USD 70 to USD 65, Gazprom Neft’s indicators will not alter significantly.   

Analysts at Standard & Poor’s further believe that Gazprom Neft would be able to handle the changes in the Russian hydrocarbon tax regime well. Even while the company’s refining capacity is among the largest in the oil industry, the spectrum of petroleum products being processed is wide, and exports are relatively small.

At the same time, Standard & Poor’s noted that it may lower the company’s ratings if Gazprom Neft facilitates new acquisitions that would be financed by debt instruments without the support of the parent company. Conversely, if Gazprom shows greater support for its subsidiary in the future, the rating may be revised upward.