Saturday, October 23, 2010

Performance of Russian Oil Co’s Remains “Robust”

A recent report by ratings agency Moody’s suggests that Russian integrated oil and gas companies demonstrated financial robustness during the economic downturn, as "certain key features" acted to support their operational and financial profiles.

It notes that negative effects of low oil prices were mitigated by a devaluation in the Rouble and favourable changes to the Russian tax system, which along with cost-containment initiatives and good access to funding boosted the companies' resilience to market turmoil. In fact, the ratings agency said outlook for the sector is stable.

The report titled "Russian Integrated Oil and Gas Companies: 2009-10 Review and 2011 Outlook", further suggests that since late 2009 and all through H1 2010, the operating and financial performance of Russian players gradually improved post-recession, lifted by relativelyhigher oil prices as the global economy recovered.

Moody’s now feels that the operating performance of Russian oil companies is likely to improve in 2010 and in 2011 on the back of stronger oil prices and ongoing cost-cutting and modernisation initiatives. However, the ratings agency does not believe there will be a major upwards trend in profitability in H2 2010 or in 2011, due to the growing tax burden and inflation in non-controllable costs, notably energy and transportation tariffs.

Furthermore, it must be noted that despite overseas overtures, the current reserves and production bases of Russian companies remain concentrated in their own backyard. This, according to the report, "exposes them to geological and geopolitical risk."

Despite the lack of positive ratings momentum, in 2010, Russian players benefited from greater access to bank and bond funding, with lenders offering longer maturities at lower rates. Moody's expects lending conditions to continue to improve in 2011. In addition, overall free cash flow improved in 2010 and will likely remain marginally positive in 2011 as companies ramp-up capital expenditure on projects that were delayed during the downturn.

Continuing with Russia, on October 22 Moody's assigned a provisional rating of (P)Baa2 to the upcoming Eurobond issue by Lukoil via Lukoil International Finance B.V., its indirect and wholly owned subsidiary. The rating is based on an irrevocable and unconditional guarantee from the Russian company and is in line with the company's issuer rating of Baa2. The outlook is stable, according to Moody’s.

The proceeds are largely expected to be used by Lukoil for general corporate purposes, as well as refinancing of existing indebtedness. Moody's believes the Eurobond issue will support Lukoil's liquidity position.

© Gaurav Sharma 2010. Photo: Photo: Oil Drill Pump, Russia © Lukoil

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