Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )
 December 22, 2015 - 11:13 AM EST
Print Email Article Font Down Font Up
Fitch Affirms ENAP's FC IDR at 'A' & National Scale Rating at 'AAA(cl)'

Fitch Ratings has affirmed the foreign currency Issuer Default Rating (FC IDR) of Empresa Nacional de Petroleo (ENAP) at 'A'. Fitch has also affirmed ENAP's national scale rating at 'AAA(cl)'. These rating actions affect approximately USD2.1 billion of outstanding international bonds and USD570 million of domestic bonds.

The Rating Outlook is Stable.

KEY RATING DRIVERS

ENAP's ratings reflect its 100% ownership by the Chilean government and the sound credit profile of its parent. The company has strong legal, operational and strategic ties with the state, and possesses strategic importance to Chile given it assures a significant portion of the country's energy supply. ENAP owns 100% of the refining capacity of the country, meeting approximately 61% of the internal demand, and representing around 40% of the country's energy matrix. As a state-owned company, ENAP's FC IDR is strongly linked with the credit profile of the Chilean sovereign (FC IDR 'A+'/Outlook Stable), although direct financial support provided by the government has been limited.

Strong Government Support

ENAP's ratings reflect the historical support shown by the Chilean State in various ways, and Fitch's analysis includes the assumption that the State of Chile will continue to provide timely and sufficient financial support to the company in the event of financial distress. The Chilean government is strongly involved in ENAP's business as the Ministry of Finance approves ENAP's budget and any new debt assumed by the company. In 2015, government support materialized in the form of a payment of close to USD90 million as compensation for subsidies granted by ENAP for natural gas consumption in the Magallanes region. Positively, another compensation payment, included in the Ministry of Energy's budget, is expected to be approved for 2016 as well. Additionally, the government's energy agenda announced in 2014 included a USD400 million capital increase for ENAP, which will be made in conjunction with a Corporate Governance law for the company that is expected to be in Congress in the second half of 2016.

Finally, the Chilean Government has stated in different ways that ENAP will be the vehicle through which the state will promote investments in several segments of the electric / oil & gas market in Chile. In the past, government support has been reflected in a temporary capitalization of retained earnings at ENAP's subsidiaries since 2009 (and approved until 2016), suspension of dividend payments over the past six years, and a USD250 million equity injection in 2008. Although the Republic of Chile does not explicitly guarantee any of ENAP's indebtedness, all of the financial debt has a Change of Control Clause.

2015 EBITDA above Expectations; Normalized EBITDA of USD550-USD650MM Expected for Next Few Years

During the first nine months of 2015 ENAP's cash flow generation has come well above expectations in spite of the sharp reduction of international oil prices. As of the last 12 month period (LTM) ended September 2015 ENAP recorded EBITDA of USD800 million, mainly as a result of the positive refining US margins, which ENAP mirrors. Refining margins did not show the typical seasonal downturn in the American summer season, as oil consumption in the US did not decrease as expected.

During recent years, ENAP's EBITDA was evenly generated between the two market segments, E&P (Exploration and Production) and R&M(Refining and Marketing). However in the YTD September 2015 period, the E&P segment lost ground due to the decline of international oil prices and generated 26% of the consolidated EBTDA, while the R&M business unit grew to 71%. The new Gas & Power (G&P) business unit generated some 3% of consolidated EBITDA, including ENAP's participation in GNL Quintero ('BBB+'/ Outlook Stable). G&P was created in 2014 in order to lead initiatives and projects that are going to promote the use of Natural Gas (NG) in the Chilean Energy Matrix, in line with the goals set by the government in its Energy Agenda.

The company's E&P financial performance has limited exposure to international oil price declines. Only ENAP's operations in Egypt, which represent 21% of the company's oil & gas production, are exposed to international prices. Production in Argentina is linked to the domestic hydrocarbon price program that is 40% above global prices; operations in Ecuador are related to service contacts with fixed tariffs; production in Chile (mainly gas) receives subsidies from the government. Additionally, the company hedges most of its exposure to crude oil price volatility between the moment the crude oil is bought and the time it is sold through time spread swaps and other hedging instruments, thereby protecting the business' margins.

Fitch expects ENAP's EBITDA for 2015 to range between USD700 to USD730 million as refining margins have declined in the last quarter of the year. Going forward, ENAP's normalized EBITDA is projected in the range of USD550 million to USD650 million, at least until 2018-2019. Starting in 2018-2019, current investments in E&P in Argentina and Magallanes and in power generation in Chile are expected to start generating cash flows. Nonetheless, unexpected adverse market conditions could imply more volatility during the next five years.

Improved Credit Metrics; Still High for the Rating Category

ENAP's financial metrics as of LTM September showed a strong improvement as compared to year-end 2015 resulting from the stronger than expected increase in EBITDA generation, with a leverage ratio measured as financial debt to EBITDA declining to 4.7x from 6.3x, and an interest coverage ratio above 4x. However, Fitch does not expect this performance to be sustainable in the future, as conditions for refining margins in the first nine months of 2015 have been extraordinary and unlikely to become recurrent. Assuming a normalized EBITDA generation of USD550-USD650MM per year, Fitch is forecasting that ENAP's leverage ratio should stand close to 6x-6.5x, and the interest coverage ratio between 3x and 4x.

ENAP's metrics may improve over the mid-term, although Fitch projects that they will remain weak for the rating category. In a base case scenario, credit metrics for the next years will depend on the pace of the company's investment plan and thus on the amount of additional debt needed. Capex for 2016 is forecast to be close to USD650 million and includes investments in Argentina (USD300 million in 1P reserves over the next two to three years, as the exploitation concession Area Pampa del Castillo-La Guitarra was extended for a 10-year period to Enap-Sipetrol in October 2015), in Magallanes (USD100 million in non-conventional gas for 2016), and in power generation projects. Fitch anticipates continued strong parent support, which includes the assumption of the USD400 million capital injection announced in the energy agenda and expected over 2016-2017. In absence of such capitalization, additional debt could range in USD100-200 million over the next two years.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Fitch price deck for West Texas Intermediate (WTI) prices of USD50/bbl in 2016, USD60/bbl in 2016, and USD65/bbl in 2018;

--2016 consolidated capex of USD650 million;

--USD400 million capital injection for 2016-2017;

--Subsidies for gas consumption in the Magallanes Region remain in place;

--Continuous State support.

RATING SENSITIVITIES

ENAP's ratings could be negatively affected by a downgrade of the Chilean Sovereign rating. In addition, any weakening of legal, operational and/or strategic ties with the government could put downward pressure on ENAP's ratings.

A positive rating action is not envisioned due to the company's weak capital structure and financial profile for its rating category.

LIQUIDITY

Liquidity Improved but Still Weak; Access to Refinancing Expected to Remain Strong

ENAP's liquidity remains relatively weak, although it has shown an important improvement over the past two years, as the company refinanced a large portion of its short term debt and improved its debt maturity profile. Cash on hand as of September 2015, amounted to USD283 million, while current maturities were USD480 million although this figure includes revolving short-term debt for USD300 million. Additionally, some 15% of this cash is located in Argentina, reducing its availability/liquidity. ENAP's liquidity is reinforced by committed lines of credit of close to USD100 million.

Financial maturities for the next 3 years (2016-2018) are manageable and range between USD280 and USD410 million per year. In 2019, ENAP will face maturities for USD702 million, mainly bonds. Fitch expects for the company to start a program of liability management to refinance in advance upcoming major maturities. Fitch does not see this as a major risk due to the company's proven access to the financial markets. Fitch expects access to local and international markets to remain strong and based on a strong government support.

FULL LIST OF RATING ACTIONS

Fitch affirms ENAP's debt instruments as follows:

--FC IDR at 'A';

--Senior unsecured notes USD 300 million due 2019 at 'A';

--Senior unsecured notes USD 500 million due 2020 at 'A';

--Senior unsecured notes USD 500 million due 2021 at 'A';

--Senior unsecured notes USD 600 million due 2024 at 'A';

--Senior unsecured notes CHF 215 million due 2018 at 'A';

--National Scale Rating at 'AAA(cl)';

--Senior unsecured notes CLF 9.75 million due 2019 at 'AAA(cl)';

--Senior unsecured notes CLF 2 million due 2017 at 'AAA(cl)';

--Senior unsecured notes CLF 4 million due 2033 at 'AAA(cl)';

--Bond Program 303 at 'AAA(cl)';

--Bond Program 585 at 'AAA(cl)';

--Bond Program 823 at 'AAA(cl)'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997221

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997221

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Xavier Olave
Associate Director
+1-212-612-7895
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Paula Garcia-Uriburu
Director
+562 2499 3316
or
Committee Chairperson
Lucas Aristizabal
Senior Director
+1-312-368-3260
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com


Source: Business Wire (December 22, 2015 - 11:13 AM EST)

News by QuoteMedia
www.quotemedia.com