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TEXT-S&P summary: OAO NOVATEK
S&P base-case operating scenario
We forecast that EBITDA will improve to about RUB100 billion-RUB105 billion in 2012 ($3.1 billion-$3.3 billion assuming a U.S. dollar/Russian ruble exchange rate of about 32), up from RUB90 billion in 2011. We base this forecast on continued healthy production that we anticipate will increase to about 58 billion-60 billion cubic meters in 2012, from about 53.7 billion cubic meters in 2011. We also anticipate that NOVATEK will benefit indirectly from a 15% increase in the regulated domestic gas price for the country's biggest gas producer, Gazprom, effective from July 1, 2012.
We note Gazprom's recent decision to temporarily stop buying gas from independent gas producers like NOVATEK. According to management, the risk of this ban for NOVATEK is limited. If anything, we expect the ban to be temporary and have no bearing on sales to end customers via Gazprom's transportation network (67% of NOVATEK's gas shipments in the second quarter of 2012). We also see NOVATEK's increase in sales to other parties as a mitigating factor. Nevertheless, we continue to view exposure to Gazprom as a fundamental risk for the Russian gas industry.
We anticipate that NOVATEK's return on capital will remain solid in 2012, supported by low-cost onshore operations from a few key gas fields.
S&P base-case cash flow and capital-structure scenario
In 2012, we forecast that NOVATEK's funds from operations (FFO) will increase to $2.4 billion-$2.5 billion from about $2.5 billion in 2011. We believe that cash flow generation should continue to benefit from increased production and prices.
While we envisage that NOVATEK's credit ratios will remain robust, with FFO to debt of about 70% and debt to EBITDA about 1x, we now foresee negative, or at best neutral, FOCF because of the group's more aggressive capital spending plans. NOVATEK has not yet taken a final investment decision, but we anticipate that Yamal LNG and two of its partners will undertake the construction of a liquefied natural gas (LNG) plant in the Yamal peninsula for a total estimated cost of at least $18 billion.
We assess NOVATEK's liquidity as "adequate" under our criteria. We anticipate that liquidity sources will cover uses by more than1.2x in the near term, even in the event of an unforeseen EBITDA decline. We think that the group's debt maturities should be manageable. Nevertheless, we note relatively large debt maturities of about RUB27 billion in total until December 2013.
Our assessment of NOVATEK's liquidity profile incorporates the following forecasts and assumptions:
-- Estimated sources of about $4.0 billion-$4.5 billion. These include cash (of which we assume RUB10 billion is tied to operations); our estimate of FFO; and an undrawn long-term RUB40 billion committed credit facility from Russian bank BPS-Sberbank (B-/Stable/C) due in December 2014.
-- Estimated uses of about $2.7 billion-$3 billion, including capital spending, short-term debt, and dividends.
-- Our expectation that net sources will remain positive, even if EBITDA declines by more than 15%.
-- Our view that compliance with financial covenants could survive a 15% drop in EBITDA.
As of June 30, 2012, the group had an ample EBITDA cushion against a consolidated leverage ratio covenant of 3x and EBITDA interest coverage of more than 4x.
The stable outlook reflects our view that NOVATEK's operating cash flow will continue to benefit from increasing production and domestic gas price realizations, as well as the group's competitive cost structure. We anticipate that the group will continue to manage its liquidity.
While there is some headroom at the current rating for further small to midsize acquisitions, we could take negative rating actions if debt to EBITDA were to rise to more than 1.5x and FFO to debt were to remain less than 60% for a lengthy period.
The rating could come under pressure if management undertook large debt-financed acquisitions, or if it managed capital spending in such a way that FFO to debt was lower than 60% for a prolonged time. Negative rating actions could also follow adverse regulatory changes, operational risk related to Gazprom, an escalation of costs or capital expenditure (capex) inflation, or increased mineral taxes.
If NOVATEK decides to develop the LNG project in the Yamal peninsula, we anticipate that it will pass on a large share of the development costs to international partners, in line with its guidance. To date, only one partner, Total, has been announced.
Ratings upside is unlikely, because the rating is already high for a group with such large exposure to Russia.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
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