Venezuela, Mar 28, 2020 – Russia-based PJSC Oil Company Rosneft (Rosneft, Baa3 stable), one of the world’s largest integrated oil and gas companies, announced that it had signed an agreement with a company wholly owned by Russia’s government (the name has not been disclosed yet) to sell all of its interest and cease participation in its Venezuelan businesses. The sale includes Rosneft’s five upstream joint ventures, two oilfield services companies and commercial and trading operations. Rosneft will receive a settlement payment equal to a 9.6% stake in Rosneft’s share capital, which Rosneft’s wholly owned subsidiary will hold and will be accounted for as treasury shares. As of 27 March, the market value of the stake was $3.9 billion.
The agreement is credit positive for Rosneft because it significantly reduces the risk of further sanctions without materially affecting the company’s asset base and credit metrics. Earlier this year, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) added Rosneft’s Switzerland-based trading subsidiaries Rosneft Trading SA and TNK Trading International S.A. to its Specially Designated Nationals (SDN) sanctions list, accusing them of breaching US restrictions against trading and transporting oil produced in Venezuela. While the imposed sanctions did not specifically apply to Rosneft itself, despite Rosneft’s stakes in the subsidiaries exceeding 50%, Rosneft’s continuing operations in Venezuela and trading the locally produced oil risked triggering more broad sanctions against the company, potentially undermining its own international sales.
Rosneft’s business in Venezuela has been represented primarily by its five upstream joint ventures, which produced 2.2 million tonnes (mt) of oil in 2019 (Rosneft’s share), or less than 1% of the company’s total liquid hydrocarbons (crude oil and gas condensate) production over the same period. In addition, over 2014-17 Rosneft and its associated entities provided around $6.5 billion in prepayments to Venezuelan national oil company Petroleos de Venezuela S.A. (PDVSA) and its joint ventures to purchase their oil and petroleum products for subsequent resale. By 30 September 2019, the latest reporting date at which Rosneft disclosed the outstanding amount of these prepayments, they had declined to around $800 million, or less than 1% of the company’s 2019 revenue.
We do not expect the disposal to have a material effect on Rosneft’s leverage and cash flow metrics because of the small scale of the Venezuelan operations relative to Rosneft’s other businesses, the largest of which is in Russia, where the company produced 98% of its hydrocarbons in 2019. However, Rosneft’s credit metrics will weaken in 2020 because of the drop in oil prices, driven by the global oil oversupply following the collapse of the OPEC+ agreement amid the sharp decline in global economic growth because of the coronavirus outbreak.
Assuming the 2020 average oil price at $30 per barrel of Brent and Rosneft’s broadly flat hydrocarbon production volume compared with 2019, we expect the company’s total debt/EBITDA to increase above 3.5x by year-end 2020 from 2.6x a year earlier, and its retained cash flow (RCF)/net debt to decline towards 15% from 23% over the same period (all metrics are Moody’s-adjusted, with Moody’s-adjusted debt including prepayments received for oil deliveries under long-term contracts).
Rosneft’s largest shareholders are JSC Rosneftegaz, which is wholly owned by the Russian state and holds an interest of 50% plus one share; BP p.l.c. (A1 stable), which holds 19.75%; and QH Oil Investments LLC, which is controlled by the sovereign wealth fund Qatar Investment Authority and holds 18.93%. The company is listed on the Moscow Exchange and the London Stock Exchange (GDRs), with a free float of around 11%.
Should the Russian state’s interest in Rosneft decline as a result of the transaction, we will accordingly assess the effect on Rosneft’s rating and the current high probability of state support to the company in the event of financial distress under our Government-Related Issuers (GRI) rating methodology. That said, we do not expect any changes in the company’s close credit linkages with the Russian government and its status as a strategic holding of the state because of its economic, political and reputational importance to the sovereign.
Credit Outlook: 2 April 2020. Pg. 28
Moodys
Atlantic Investors Service 