Moody’s Investors Service lowered its outlook for Russian state-controlled oil giant Rosneft due to a “significant increase” in the company’s leverage and risks associated with the integration of the newly- acquired TNK-BP International Ltd.
Although Moody’s put a negative outlook on the company, they left Rosneft’s credit rating unchanged, due to close Kremlin support and connections.
“We have confirmed Rosneft’s ratings at Baa1 because despite the significant increase in its leverage and the risks associated with integrating TNK-BP, we consider that this is offset by what we view as the consolidated entity’s greater importance to the Russian state, reflected by the meaningful political back-up received by Rosneft during the course of the transaction,” Julia Pribytkova, a Moody’s Vice President – Senior Analyst and lead analyst for Rosneft said in an emailed statement.
Rosneft took on considerable debt as part of its TNK-BP acquisition. “Given that approximately $24 billion, or 70%, of new debt (without taking into account $7.5 billion of trader cash advances secured by oil deliveries) will mature between the end of 2013 and beginning of 2015, the company will continue to face elevated refinancing needs in the next 24-30 months,” said Moody’s.
Credit Rating Supported, for Now
“The Baa1 ratings are supported by Rosneft’s strong business profile as the world’s largest public oil company in terms of reserves and production. Given that it is controlled by the Russian state, Rosneft enjoys preferential access to oil and gas resources and lobbying power in the government, as well as established relationships with the state-owned banks. Rosneft’s partnership with BP which now owns approximately 20% of the company, could provide a positive boost to the former’s operations efficiency, particularly in the upstream segment. However the degree of BP’s involvement in Rosneft’s operations, and its ability to influence its operating and financial strategy, will largely depend on the scope of shareholder rights to be allocated to BP following the annual shareholder meeting to be held on 20 June 2013.”
Lack of Transparency Contributes to Negative Outlook
The ratings agency cited Rosneft’s debt-constrained financial profile and lack of transparency regarding corporate strategy as potential risks. Moody’s blatantly said if Rosneft disclosed more information, it could stabilize the ratings outlook.
“Rosneft’s ability to maintain pre- transaction efficiency of operations and reserves management quality may be tested as a result of the company’s more leveraged financial profile and a potentially lengthy transition period,” said Moody’s.
“Although the transaction holds significant synergetic potential for Rosneft, particularly in terms of capital expenditure (capex) optimization, such synergies make take a few years to fully materialize. Moody’s could stabilize the outlook on Rosneft’s ratings if the company provided detailed guidance on its consolidated cash flow generation, capex and deleveraging strategy and demonstrated that it was able to efficiently integrate the two businesses.”
