The ratings reflect Bashneft’s strong refining business, upstream operations comparable to those of similarly rated oil and gas peers as well as Fitch’s expectations of the company’s ability to successfully achieve higher coverage of refining capacities with own oil production.
The company’s business profile benefits from a relatively high level of sophistication and complexity of its downstream operations with a total primary refining capacity of some 24 million tonnes per annum. This is demonstrated by the fact that its refining depth and Nelson Complexity Index are well above the Russian average and are on par with those of international refineries rated by Fitch. Further modernisation of the group’s three refineries should enhance its refining characteristics as well as enable it to produce more value-added products and maintain sound refining margins.
Fitch expects the earnings contribution of the upstream division to increase further in the medium term following the development of the Trebs & Titov fields. The company plans to commence production at these fields in 2013 with peak production reached in 2018–2022. The agency anticipates that the development of these fields will enable Bashneft to support its positive production dynamics over the next four to five years, albeit at a much slower rate than during 2009–2011, and extend its geographic reach beyond its core region — the Republic of Bashkortostan — accounting for over 90% of its oil production.
Fitch expects Bashneft to increase oil output to about 326 kbopd (excluding M&A) by 2016 from 302 kbopd in 2011. This should strengthen its position as a small to medium-sized player in the E&P sector and improve the ratio of its oil output to oil refining as it is currently skewed towards the latter. At the same time, Fitch believes that the organic prospects of oil production expansion in the long term are limited and thus expects the company to become an active M&A player in the oil and gas sector.
The ratings also consider Bashneft’s high reserves replacement rate and solid reserves life achieved due to the application of enhanced oil recovery techniques. While the company’s relatively high production costs put it at a disadvantage compared with Russian counterparts such as OJSC OC Rosneft ('BBB'/Stable) and OAO LUKOIL ('BBB-'/Stable), they are lower than those of OAO Tatneft ('BB'/Stable), which also operates mature fields, and those of some international peers.
Bashneft demonstrated a solid financial profile in 2011, but Fitch expects some pressure on its credit metrics over the next three to four years, although they are likely to remain comparable to those of international refining companies and similarly rated integrated oil and gas companies. Bashneft’s credit profile will be driven by the implementation of an intensive investment programme of about USD1.2bn per annum over 2011–2016, reflective of its growth strategy and Fitch-forecast dividend payouts at levels lower than those in 2009–2011. As a result, Fitch anticipates Bashneft’s net leverage-related ratios to rise to 2x in 2012–2013 and coverage ratios to remain in mid-single digit territory based on Fitch’s conservative oil price deck of USD95/bbl for 2012 and USD85/bbl for 2013.
Furthermore, Bashneft’s ratings reflect the financial policy determined by its majority shareholder Sistema Joint Stock Financial Corp (Sistema; 'BB-'/Stable), a Russian industrial investment company with diversified holdings. As Bashneft and OJSC Mobile TeleSystems ('BB+'/Stable) are the main contributors to Sistema’s cash flows, Fitch expects Bashneft to continue paying generous dividends. Sistema appears to have a great degree of control over cash upstreaming from its holdings through asset sales and/or dividends. For example, following the acquisition of the Bashkir oil & energy assets in 2009, Sistema transferred USD1.4bn of debt associated with this acquisition to Bashneft.
The Stable Outlook reflects the balance of risks inherent in the implementation of the company’s business strategy and its relationship with Sistema. Fitch believes that Sistema will have to strike a balance between its dividend appetite and Bashneft’s capex requirements necessary to implement its strategy and increase the company’s long-term value. While Sistema will continue extracting relatively high dividends from Bashneft, it is also interested in the development of the oil business to gain a return on its investment. The medium-term gross debt/ EBITDA target of 2x set by Bashneft can serve as an indicator of balancing its dividend and investment policy.
Fitch notes that an aggressive capex programme and/or acquisition-driven growth strategy resulting in a material deterioration of the company’s credit metrics, as well as significant pressure from Sistema regarding dividends would be negative for Bashneft’s ratings.
On the other hand, an increase in the Bashneft’s E&P operations while maintaining a strong financial profile, together with a less ambitious dividend policy and/or clearly set restrictions of cash upstream by Sistema, as well as a successful upgrade of the refineries leading to solid sustained refining margins would be positive for ratings.