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.
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.
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 Improved but Still Weak; Access to Refinancing Expected to
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
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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