Fitch Expects to Rate Medanito S.A.'s Sr. Unsecured Issuance 'CCC+/RR3'
Fitch Ratings has assigned foreign and local currency Issuer Default
Ratings (IDRs) of 'CCC' and 'B-', respectively, to Medanito S.A.
(Medanito). The Rating Outlook for the company's local currency IDR is
Fitch has simultaneously assigned an expected rating of 'CCC+/RR3' to
Medanito's proposed international senior unsecured bond issuance of up
to USD150 million in Reg S notes with a five-year bullet maturity (2020
maturity). Proceeds from the transaction would be used to refinance
existing debt and for general corporate purposes.
The 'RR3' Recovery Rating assigned to the notes reflects the expectation
of a recovery in the range of 50%-70% in the event of default due to
Fitch's belief that a default by Medanito would most likely be driven by
transfer and convertibility restrictions imposed upon the payment of
foreign debt, not a material deterioration of the company's business or
KEY RATING DRIVERS
Medanito's ratings are constrained by the 'CCC' country ceiling of the
Republic of Argentina (Fitch local and foreign currency IDRs of 'RD').
The company's ratings are also restricted by the high regulatory risks
associated with operating in the energy sector in Argentina, and the
long-term need to pursue a robust capital expenditure plan to develop
the company's hydrocarbon reserves and increase production. The company
faces a volatile domestic business environment and inflationary
pressures on its cost structures.
Country ceilings are designed to reflect the risks associated with
sovereigns placing restrictions upon private sector corporates, which
may prevent them from converting local currency (LC) to any foreign
currency (FC) under a stress scenario, and/or may not allow the transfer
of FC abroad to service FC debt obligations. Key concerns of corporates
domiciled in Argentina include high inflation, government meddling,
economic uncertainty, and limited access to debt markets especially
after the country's recent default.
Regulatory Risk Remains High: Medanito's ratings reflect high regulatory
risk given strong government influence in the Energy sector, though the
Nov. 22, 2015 election of a conceivably more market friendly
administration could allay this risk. Medanito operates in a highly
strategic sector where the government both has a role as the price
regulator and also controls subsidies for industry players. In response
to the economic crisis of 2001 and 2002, the Argentine government,
pursuant to the Public Emergency Law (Law No. 25,561), established
export taxes on certain hydrocarbon products. In subsequent years, in
order to satisfy growing domestic demand and ease inflationary
pressures, this policy was supplemented by constraints on domestic
prices, temporary export restrictions, and subsidies on imports of
natural gas and diesel fuel. As a result, until 2008, local prices for
oil and natural gas products had remained significantly below those
prevailing in neighboring countries and international commodity
Hydrocarbon price increases have been seen in recent years in the
Argentine domestic market, as the government has attempted to
incentivize exploration and production (E&P) producers to increase
production. Following the sell-off in global oil prices, this has led to
a positive dynamic in the Argentine domestic market as it has allowed
oil prices to remain at levels above global oil prices. Long-term prices
are more difficult to project given the Argentine government's volatile
history. The only market segment where Medanito has been negatively
impacted by the decline in global hydrocarbon prices is in its midstream
services segment, as the company sells petroleum products in the export
Higher Argentine Oil Prices: Positively, despite the global decline in
oil prices seen during the last year, the price of light oil in the
domestic Argentine market has declined by only 11% in 2015 (to USD77/bbl
from USD84/bbl). Fitch is projecting that for 2015, the company's
implied price per barrel of crude oil sold will be USD75/bbl, which is
approximately 50% higher than the average price of West Texas
Intermediate (WTI) in the United States. In terms of gas prices,
Medanito's average realized price for gas sold increased to
USD3.69/MMBTU in 2014 from USD3.18/MMBTU in 2012 (a 16% increase),
mainly driven by its contract with the Chevron Corporation that has an
annual price escalator component.
Diversified Business Model: Founded in 1993, Medanito benefits from its
diversified business portfolio. The company was originally founded as a
midstream oil and gas company, which then expanded into the upstream
hydrocarbon E&P business. Medanito is currently the 13th largest oil
producer in the country in terms of production. Besides E&P, the
company's business portfolio includes the following complementary
business lines: 1) midstream; 2) power generation; and 3) oil & gas
engineering services. In 2014, 53% of the company's revenue base was
composed of Upstream sales, with Midstream making up 29%, Generation 7%,
and Engineering Services and Other Revenues 11%.
Chanares Improves Reserve Life: Via the acquisition of Chanares S.A.
(CHASA), Medanito gained a presence in a new basin (the Cuyana basin in
the province of Mendoza) and increased its reserve life from five years
to 11 years (1P reserves). In July 2014, Medanito closed the transaction
whereby it acquired 52% of CHASA for approximately USD59 million, with
the remaining 48% purchased by Medanito's shareholder, Exmed S.A.
Subsequently, Medanito acquired an incremental 3% in Chanares, giving it
a 55% ownership stake.
As of year-end 2014, Medanito's consolidated net 1P reserves totalled
26.1 million BOE (83% oil). If the company manages to extend concessions
that are expiring in the near- to medium-term, the company's 1P reserves
will total 34.3 million BOE. This corresponds to a reserve life of 11
years. Excluding CHASA, Medanito's 1P reserves total 9.4 million BOE
corresponding to a reserve life of five years.
The CHASA acquisition not only strengthened Medanito's reserve profile,
but it provides some upside potential from its exploration
opportunities. CHASA's concessions are not set to expire until 2027, and
Medanito sees significant potential to increase production levels via
aggressive well work and a new drilling campaign (four exploratory
prospects with low-to-medium geological risk). Positive results can
already be seen as average consolidated crude oil production for
Medanito as of September 2015 was 3,470 bbld versus 2,664 bbld for 2014
(a 30% increase). Total Oil and Gas production of 6,171 barrels of oil
equivalent per day (boed) increased by 15% versus 2014 average
production of 5,387 boed.
Slightly Decreased But Stabilizing Financial Results: At YE December
2014, the company's overall revenues of USD188 million were 4% higher
than full-year 2013 revenues of USD181 million. Reported EBITDA of USD40
million declined by 30% versus 2013 results, as margins declined to 21%
from 31%. Financial results in 2014 were negatively impacted by two
large non-cash effects. Adjusting for both these non-cash charges,
adjusted EBITDA in 2014 would have been approximately USD54 million
yielding a 29% margin, which is slightly down versus 2013 EBITDA of
USD56 million. Fitch uses average USD/Peso exchange rates to convert
Medanito's financial results into US dollar equivalent figures.
Revenue generation has improved on a reported basis since mid-2014,
given the closing of the CHASA acquisition in July 2014. Revenues for
the last 12 months (LTM) September 2015 period of USD199 million have
increased by 6% versus full year 2014, while EBITDA was slightly
improved at USD56 million versus normalized 2014 EBITDA of USD56
million. This can be explained by the upstream segment, in which the
netback per BOE at CHASA is significantly lower versus Medanito's legacy
netbacks. For example, on a stand-alone basis Medanito's netback per
barrel was USD30.5 in the nine-month period ending September 2015. In
the same period, CHASA registered a netback of USD8/BOE, which has
helped to drag down EBITDA generation even though revenues have
increased post-acquisition. Now that Medanito is integrating CHASA into
its operations, the company expects to increase the netback in CHASA's
operations to more fully benefit from the transaction.
Long-term Leverage Targeted at 2x: On a normalized EBITDA basis, the
company's leverage ratio (defined as total debt:EBITDA) is approximately
2.9x as of September 2015, which is significantly higher than historical
leverage levels though an improvement versus 2014. Historically,
Medanito has had a very conservative capital structure with total
debt:EBITDA of 1.5x-2.0x before 2014. Management is still targeting
long-term leverage of 2.0x total debt:EBITDA, with incremental leverage
above 2.5x requiring unanimous board approval. The CHASA acquisition,
which increased leverage to 3.1x on an adjusted basis (4.2x on a
reported basis), was seen by Medanito's management as a significant
opportunity to increase the company's reserve life and ramp up
production despite the fact leverage has risen to levels the company is
not comfortable with for the long term. Fitch is projecting leverage
will decline to under 2x starting with 2017.
Negative: Future developments that could, individually or collectively,
lead to negative rating actions in the short term:
--Further economic deterioration and the Republic of Argentina's
inability to convert and transfer foreign exchange for Medanito;
--Short-term liquidity concerns if the company is unable to refinance
its 2015-2016 maturities;
--A significant deterioration of credit metrics;
--Sustained declines in hydrocarbon reserves / production or failure to
further develop new fields, would be another potential negative factor.
Positive: A positive rating action in the short term is considered
unlikely given Argentina's current sovereign restricted default rating
and the fact the company's ratings are constrained by the sovereign's
credit quality. An upgrade of the sovereign rating could be a positive
LIQUIDITY AND DEBT STRUCTURE
Negative FCF and Stretched Liquidity: Given the company's sizeable
investment requirements, the company has not generated positive free
cash flow in the last five years. Capex in 2014 totalled a record USD209
million, mainly accounting for the acquisition of CHASA. For this reason
FCF in 2014 was -USD130 million versus (USD62 million) in 2013. Fitch
projects the company will continue registering negative FCF during
2015-2016 as it works to integrate CHASA and ramp-up production and
increase the acquired E&P assets' netback per barrel. Assuming it is
able to do both, Fitch projects positive FCF generation starting in 2017.
In the short- to-medium term, given expectations for continued negative
FCF and expectations for ramped-up capex to increase production, the
company's liquidity position is stretched. Medanito currently has USD12
million of cash on hand, while it has USD71 million in short-term debt.
To alleviate this situation, the company is looking to issue the
international Reg S bond in the amount of USD150 million with a
five-year bullet maturity. The purpose of this issuance would be to
refinance approximately USD130 million in debt with the balance used for
other corporate purposes. Post-issuance, the company's liquidity
position would be strengthened as a more manageable USD21 million in
debt amortizations would come due in 2015-2016.
--Double-digit currency depreciation per year;
--Oil & gas production ramping up from 5,400 BOED to nearly 7,000 BOED
in next five years;
--Oil prices straight-lining over next five years to Fitch Price Deck
assumption of long-term price of USD70/BBL;
--Overall, EBITDA growing to the USD100 million in next five years;
--Contingent on international issuance, leverage levels peaking in 2015
and declining to 1.5-2.0x in the long term.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings to Medanito S.A.:
--Foreign currency IDR 'CCC';
--Local currency IDR 'B-', Outlook Negative;
--International senior unsecured debt rating 'CCC+/RR3'.
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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