New US sanctions are credit negative for Rosneft and Novatek

New US-imposed sectoral sanctions on a number of Russian entities on July 16, including oil and gas companies Rosneft and Novatek in connection with the escalation of the crisis in Ukraine, will effectively prohibit the two and other sanctioned entities, including Russian banks and defence companies, from procuring financing and new debt from US investors, according to Moody’s.
The rating agency views the US sanctions, imposed on the same day as the EU blocked funding to Russia from two multilateral lenders, as “credit negative” for Rosneft and Novatek, particularly if sustained for an extended period.
The sanctions will significantly limit both companies' financing options and could put pressure on development projects, such as Novatek's Yamal LNG, Moody’s said.
In Moody’s opinion, Novatek is better positioned to withstand temporary liquidity constraints than Rosneft thanks to its lower leverage and manageable debt maturity profile. The company only has a $350 mln syndicated loan (10% of which is held by US banks) maturing within the next 18 months, and generates sufficient cash flows to finance its capital expenditure (capex) and repay the debt if refinancing proves difficult. As of end-March, Novatek had $1.2 bln of cash.
Novatek's outstanding Eurobonds total $2.3 bln and mature in 2016-18. Approximately 30% of the bonds are held by US investors.
Rosneft, in contrast, faces significant debt maturities. It will need to repay $26.2 bln between July 2014 and December 2015, with peak repayments of $9.4 bln and $11.8 bln in Q4 2014 and Q1 2015, respectively. Moody's estimates that approximately $5-6 bln of this will have to be refinanced. Rosneft's liquidity is supported by its strong cash generation, a cash balance of $17.5 bln as of end-March, more than $4 bln in committed backup facilities, and access to state bank financing.
The credit negative impact would become more pronounced for both Rosneft and Novatek if the EU were to impose similar bans on the financing of Russian companies. On July 16, EU leaders agreed to ask the European Investment Bank (EIB) to suspend new lending for Russia and to seek the suspension of new loans from the European Bank for Reconstruction and Development (EBRD) to Russia; Novatek and Rosneft have no transactions with either institution. The EU also agreed to expand its restrictive measures, with a view to drawing up a list of targeted entities (including Russia) by the end of July. In Moody's opinion, an extension of sanctions to the European financial sector would dramatically limit funding and project partnership options for the affected companies and drive up costs, potentially putting a hold on investments, and slowing down future growth.
Rosneft – in which the Russian state holds a 69.5% share via its fully owned agent OAO Rosneftegaz – is Russia's largest integrated oil and gas company. Proven oil and gas reserves amounted to 41.77 bln barrels of oil equivalent (boe) and daily production reached 4.9 mln boe in 2013. Consolidated refining capacity covers half of the group's consolidated crude oil production. In the last twelve months ended March 2014, Rosneft's consolidated revenue net of export duties amounted to approximately $104.1-112.4 bln and its Moody's-adjusted EBITDA to around $34.3 bln.
Novatek is Russia's largest independent gas producer and second-largest gas company in Russia – after state-controlled Gazprom.
In the first nine months of 2013, Novatek reported RUB 214.2 bln ($6.7 bln) in revenue with adjusted EBITDA of RUB 88.6 bln ($2.9 bln). Novatek's key shareholders are Leonid Mikhelson (25%), who is also the CEO and Chairman; Volga Resources (an investment vehicle of Gennady Timchenko), with a stake of 23%; TOTAL S.A., with a 16.0% stake, with a right to increase the stake to 19.4%; and Gazprom, with a 10% stake. Novatek's free float is estimated to be around 26%.