29 Jul 2010 19:16

Russian Oil Producer LUKoil on CreditWatch Negative on plans to buy back shares from ConocoPhillips

MOSCOW. July 29 (Interfax) - Standard & Poor's Ratings Services said on Thursday that it had placed its 'BBB-' long-term corporate credit rating on Russian-based oil producer OAO LUKoil on CreditWatch with negative implications. At the same time, the 'ruAA+' Russia national scale rating was affirmed, the agency said in a statement.

The statement said: "The CreditWatch placement follows the announcement that LUKOIL Finance Ltd. (a 100% subsidiary of OAO LUKoil) had signed an agreement with Springtime Holdings Ltd. (an affiliate of [A/Stable/A-1]) to buy back 7.6% of OAO LUKOIL ordinary shares for $3.4 billion. The transaction is scheduled to be complete on Aug. 16, 2010. The stock purchase agreement also stipulates the option to further purchase up to 11.61% prior to Sept. 26, 2010."

"We placed the rating on CreditWatch to reflect the uncertainty that exists with respect to the material increase in leverage that would occur should LUKOIL Finance exercise the option, as well as our need to further analyze funding for these transactions and LUKoil's resulting liquidity situation," Standard & Poor's credit analyst Andrey Nikolaev was quoted as saying in the statement.

The statement said: "We believe exercising the 11.6% optional share buyback could stretch LUKoil's leverage beyond the level compatible with the current rating.

"The rating on LUKoil OAO reflects its standing as the second-largest vertically integrated oil company in the (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Russia national scale 'ruAAA').

"LUKoil's "satisfactory" business risk profile is underpinned by its large, profitable upstream and downstream operations in Russia, in our view. LUKoil's international diversification is a secondary credit driver. The main business risk factors are the group's exposure to the weak Russian country environment, including weak institutions, although the company has a good track record in managing country risks.

"LUKoil's "intermediate" financial risk profile is based on its moderate debt and our perception that it has ready access to bank funding and capital markets.

"At this point we expect to resolve the CreditWatch within the coming three months, after LUKoil decides whether to exercise the option to buy a further 11.6% of the shares and we gain insight how the transactions will be funded".

"Although the rating contains significant headroom in light of LUKoil's strong performance and metrics, we currently think a downgrade of at most one notch is possible if the company exercises the option or its liquidity becomes stretched," said Nikolaev.

The statement said: "We would also take into consideration the company's plans for the acquired shares or any subsequent debt reduction, as well as the financial policy for the future.

"We would likely affirm the rating if the share buyback is limited to the initial $3.4 billion 7.6% commitment and the transaction is prudently financed".