16 Oct 2009 19:24

Fitch affirms Lukoil, outlook stable

MOSCOW. Oct 16 (Interfax) - Fitch Ratings has affirmed Lukoil's Long-term foreign currency and local currency Issuer Default Ratings (IDR) and senior unsecured rating at 'BBB-' respectively, whilst affirming the company's Short-term foreign currency IDR at 'F3'. The Outlooks on the Long-term IDRs are Stable, the agency said in a press release.

LUKOIL's Long-term and senior unsecured ratings are currently supported by the company's leading market position as one of Russia's two largest upstream crude oil producers at a time when Russia is the world's largest crude oil producer in terms of output measured by barrels per day.

The ratings are further supported by the company's leading downstream refining position. LUKOIL operates the largest number of refineries of any Russian oil company and has the largest total throughput capacity as measured by barrels per day. Additionally, LUKOIL's refineries abroad mostly produce mid-to-light products such as diesel fuel and gasoline that command higher refining margins compared to heavy oil products such as fuel oil.

Uncertainty exists, however, with respect to the fulfilment of the company's business plan to increase downstream integration into the European market through the acquisition of refineries in Italy and the Netherlands. Whilst Fitch has incorporated this management strategy into LUKOIL's current ratings, a longer track record is required to see demonstrable results and how these newly-acquired assets contribute to profitability and cash flow.

The successful refinancing of new debt used to fund the refinery acquisitions, and a lengthening of the company's debt maturity profile, will also be necessary to maintain current ratings and Outlook. However, Fitch anticipates that LUKOIL will maintain its historically demonstrated conservative financial profile, such as remaining free cash flow positive and keeping on balance sheet total debt/EBITDA below 1x, through the business cycle, which is supportive of the current ratings and Outlook.

LUKOIL remains the only Russian company with a significant international presence that includes upstream, refining and retail sales of petroleum products. While most of LUKOIL's upstream reserves and production remain in Russia, international operations are growing in the upstream segment in terms of the share of LUKOIL's total reserves and production base. Recent downstream acquisitions in Europe have added to the company's overall refining capacity.

Additionally, LUKOIL has been successful in diversifying into the domestic gas segment and plans to integrate part of its natural gas production with its power business, TGK-8, which was acquired over the course of 2008 and 2009.