S&P ups rating outlook on Georgian Oil and Gas Corporation
Baku, Azerbaijan, Nov. 16
By Elena Kosolapova – Trend:
The International Rating Agency S&P Global Ratings had revised its outlook on Georgian Oil and Gas Corporation (GOGC) to stable from negative, the rating agency reported. S&P also affirmed 'B+/B' long- and short-term corporate credit ratings.
“The outlook revision reflects our expectation that higher EBITDA generation should help GOGC accommodate its capital expenditure (capex) projects without a material increase in leverage,” the rating agency said.
Thanks to currently favorable gas purchase prices and successful commissioning of the Gardabani thermal power plant in 2015, S&P expects GOGC's EBITDA to increase to over Georgian lari (GEL) 200 million (about $80 million) per year, compared with GEL125 million in 2015. Also, the rating agency understands that GOGC now plans to start large investments in its two major capex projects only in mid-2017 (expansion of the Gardabani thermal power plant [total cost estimated at US$180 million]) and 2018 (construction of an underground gas storage facility), after it obtains long-term financing for both projects.
“We understand that the new assets will now be commissioned and start generating cash flow no earlier than in 2019. Still, we think the increased operating cash flow should reduce the pressure on free operating cash flow (FOCF) in 2016-first half 2017 and support leverage below 4x during the heavy construction phase,” S&P said.
GOGC's business risk is constrained by the company's reliance on several large long-term contracts for gas supply from Russia and Azerbaijan. The impact on GOGC's earnings and cash flow generation would likely be material if the contract terms were unexpectedly amended during the contract period.
Constraining factors also include the company's lack of long-term strategic planning and a history of unexpected changes in the government's strategic decisions for GOGC.
S&P’s rating on GOGC includes a one-notch uplift, reflecting its expectation of a very high likelihood of extraordinary government support. GOGC has a mandate to ensure gas supply to the domestic market. The company is 100 percent government owned, so privatization risk is remote in the rating agency’s view.
The stable outlook reflects the view that GOGC's ratio of debt to EBITDA will be below 4x (on a gross basis, as adjusted by S&P Global Ratings), that the existing contract framework for gas purchase and sale will remain in place without any material changes, and that the company will not start new capex projects without long-term financing in place. It also assumes no major cost overruns or operational issues on the new projects. It also corresponds to the stable outlook on Georgia.
Rating upside could stem from a positive rating action on the sovereign, all else being equal. Rating upside based on GOGC's stand-alone performance is currently limited, because for an upgrade, S&P would need to revise GOGC's stand-alone credit profile to at least 'bb-', provided that the sovereign rating remained 'BB-' and the likelihood of support remained very high. This could happen if debt to EBITDA approaches 2x, but it is quite far from the base-case scenario.
The rating agency could downgrade GOGC if debt to EBITDA is sustainably above 4x, due to significantly lower profits or material capex overruns. This could happen, for example, in case of operational setbacks, or if the company's margins are squeezed by higher gas purchase prices.
Rating downside could also stem from a significant unfavorable change in the existing gas purchase and sale framework, or disposal of key assets, or government pressure to provide sizable support to other weaker GREs, or a material weakening of GOGC's role for and link with the government in case the government's strategy in the sector materially changes.
S&P could also lower the rating in case of a sovereign downgrade.