MOODY'S: SANCTIONS NO EFFECT

On 16 July 2014, the US imposed sectoral sanctions on a number of Russian entities, including oil and gas companies OJSC Oil Company Rosneft (Rosneft, Baa1 negative) and OAO Novatek (Novatek, Baa3 stable) in connection with the escalation of the crisis in Ukraine. The new sanctions will effectively prohibit Rosneft, Novatek, and other sanctioned entities, including several Russian banks and defence companies, from procuring financing and new debt from US investors and entities (companies and banks) or within the US, banks are also prohibited from procuring new equity. On the same day, EU leaders also moved to block funding to Russia from two multilateral lenders.

Moody's views the US sanctions 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. Under the latest round of measures introduced by the US Treasury Department, sanctioned entities will be barred from obtaining future loans with a maturity of more than 90 days or new equity, effectively cutting them off from long-term US capital markets. Both companies' trade activities currently remain unaffected.

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 million 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 2014, Novatek had $1.2 billion of cash. Novatek's outstanding Eurobonds total $2.3 billion and mature in 2016-18. Approximately 30% of the bonds are held by US investors.

Rosneft, in contrast, faces significant debt maturities. The company will need to repay $26.2 billion between July 2014 and December 2015, with peak repayments of $9.4 billion and $11.8 billion in Q4 2014 and Q1 2015, respectively. Moody's estimates that approximately $5-6 billion of this (taking into account the company's need to maintain a cash cushion to support its current operations) will have to be refinanced. Rosneft's liquidity is supported by its strong cash generation, a cash balance of $17.5 billion as of end-March, more than $4 billion in committed backup facilities, and access to state bank financing. However, in light of restricted access to funding and aggravated negative investor sentiment driven by geopolitical concerns and fear of further sanctions, Rosneft faces elevated refinancing risk.

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 16 July, 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. At the meeting on 16 July, 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.

OJSC Oil Company Rosneft - in which the Russian state holds a 69.5% share via its fully owned agent OAO Rosneftegaz (not rated) - is Russia's largest integrated oil & gas company. Rosneft's proved oil and gas reserves as of 31 December 2013 amounted to 41.77 billion barrels of oil equivalent (boe), in accordance with Petroleum Resources Management System (PRMS), daily production reached 4.9 million barrels of oil equivalent (boe) in 2013. Consolidated refining capacity covers approximately 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 $104.1112.4 billion and its Moody's-adjusted EBITDA to around $34.3 billion.

OAO 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 RUB214.2 billion (approximately $6.7 billion) in revenue with adjusted EBITDA of RUB88.6 billion (approximately $2.9 billion). Novatek's key shareholders are as follows: Leonid Mikhelson (25% stake), who is also the CEO and Chairman of the Management Committee; Volga Resources (an investment vehicle of Gennady Timchenko, not rated), with a stake of approximately 23%; TOTAL S.A. ((P)Aa1 negative), 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%.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

moodys.com