Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has assigned a final ‘BB-’ senior unsecured rating to US$700 million 4.75% notes issued by JSC Uzbekneftegaz (UNG; BB-/Stable). The Recovery Rating is ‘RR4’.

The notes have been issued directly by UNG, which generates most of the consolidated group’s EBITDA. Proceeds will be used for debt repayment and general purposes.

UNG’s rating is equalised with that of its parent Uzbekistan (BB-/Stable). UNG is a fully state-owned integrated natural gas and liquid hydrocarbons producer with strong links with the government. We view its Standalone Credit Profile (SCP) at ‘b+’, reflecting its medium scale and low-cost position as well as fairly high (albeit declining) leverage, regulated domestic gas prices and limitations of the general operating environment in Uzbekistan.

“We rate the US$700 million senior unsecured notes using a generic approach for ‘BB’ category issuers, which reflects the relative instrument ranking in the capital structure, in accordance with our Corporates Recovery Ratings and Instrument Ratings Criteria. While UNG has a sizeable amount of prior ranking debt (mostly debt at two OpCos and secured debt at the UNG level), the company is moderately leveraged and plans to focus on raising unsecured debt in the future. The Recovery Rating is ‘RR4’. This results in the senior unsecured rating being in line with the IDR,” Fitch Ratings noted.

The agency said: “UNG’s rating is equalised with Uzbekistan’s due to strong ties based on our Government-Related Entities (GRE) Rating Criteria. We view the status, ownership and control factor as ‘Strong’ as the state is UNG’s sole ordinary shareholder but may sell around a quarter of the company”.

“We view the support record as ‘Very Strong’ because around 80% of its consolidated debt was guaranteed by the state at end-2020. We expect that the placement of the senior unsecured bonds will lead to a moderate reduction of the share of state-guaranteed debt by end-2021. Other forms of support are the conversion of UNG’s US$1.7 billion of debt to the sovereign wealth fund of Uzbekistan and dividends payable into equity in 2020, lowered taxes, and liberalised oil product prices charged by UNG,” Fitch Ratings stated.

“We view the socio-political impact of UNG’s default as ‘Very Strong’ because the company is focused on providing gas and liquid hydrocarbons to domestic utilities, industry and the private sector, and does not export gas. Uzbekistan is reliant on gas for power generation, heating and as automobile fuel. UNG is one of the largest companies and employers in the country. We assess financial implications of its default as ‘Strong’ as UNG is a large borrower, hence deemed a proxy issuer for the government, but UNG’s debt is substantially smaller than that of the government,” the agency said in its statement.

Fitch Ratings said that UNG’s ‘b+’ SCP reflects the company’s medium scale, regulated gas prices, very low upstream costs and integration into chemicals and refining, offset by currently high leverage and a weak domestic operating environment. We estimate that successful completion of its large projects, such as a GTL plant and an expansion of its Shurtan gas chemical complex (GCC), will boost its EBITDA by more than half and reduce funds from operations (FFO) net leverage to 3.5x at end-2022 from 4.4x at end-2020.

“UNG had UZS11 trillion (US$1.1 billion) of guarantees at end-2020, mainly issued to its former subsidiary JSC Uztransgaz for its gas purchases. We view these liabilities as part of the legacy from the previous group’s structure. UNG transferred its stake in Uztransgaz to the state in 2019. According to the company, any upcoming liabilities from Uztransgaz will be covered with the assistance of the state without recourse to UNG. We do not add these guarantees to UNG’s total debt, but if the guarantees were added, the additional impact on FFO net leverage would have been around 1.3x in 2020,” Fitch Ratings underlined.

UNG has benefited from the 2020 abolition of regulated prices for condensate, oil and oil products through higher revenues. The Uzbek government plans to liberalise prices for natural gas, UNG’s main product, and liquefied petroleum gas (LPG) in 2022, which may boost UNG’s profitability if the collectability of receivables does not deteriorate. We do not incorporate higher gas and LPG prices into our rating case because the reform timing is uncertain.

Most of UNG’s EBITDA is generated by the upstream division (82% in 2020). Its consolidated hydrocarbon output was 552 thousand barrels of oil equivalent per day (kboe/d) in 2020, comparable with that of Wintershall Dea AG (BBB/Stable) or PJSC Tatneft (BBB-/Stable). Raw natural gas accounted for 99% of UNG’s production, of which around 33kboe/d of condensate and LPG was extracted. Its PRMS 1P reserve life was 12 years at end-2020, which is moderate.

UNG’s upstream EBITDA per boe was US$3/boe in 2020, one of the lowest among peers, because domestic regulated gas prices are kept low to subsidise the national economy. Nevertheless, the company generated EBITDA of US$1 billion in 2020, due to very low lifting costs and sizeable production.

UNG plans to launch its large GTL plant in the short term and complete an expansion of its Shurtan GCC in the coming years. Around 60% of UNG’s consolidated end-2020 debt was raised at the level of the GTL plant. The GTL plant should convert cheap gas into expensive diesel, naphtha and jet fuel, adding around US$0.4 billion to UNG’s annual EBITDA (Fitch estimates). Additionally, Shurtan GCC’s expansion may generate US$0.2 billion annually by using naphtha and LPG to produce polyethylene and polypropylene.

Most of UNG’s revenue comes from gas sales that are based on regulated prices indexed by a rate close to inflation, while UNG’s debt is denominated in US dollars, euros and Chinese renminbi. UNG’s petroleum products and petrochemicals prices take recent international prices and exchange rates into account. We view the possible gas price liberalisation and the start of GTL plant as positive for reducing FX debt exposure.