Fitch rates DTEK Oil & Gas B-, outlook Stable

Fitch Ratings announced on June 3 it has assigned a B-
issuer default rating (IDR) with a Stable outlook to Ukraine’s largest private
natural gas producer DTEK Oil & Gas (DTEKOG).

 

The rating is one notch below Fitch’s assessment for
Ukraine’s sovereign credit. Currently, DTEK Oil & Gas has no ratings from
other credit agencies.

 

Fitch’s rating of DTEK Oil & Gas is constrained by
the company’s small scale of operations, moderately high leverage and evolving
governance practices, including a complex group structure and related party
transactions, the agency said in its June 3 release. The rating also reflects
moderate production costs supporting stable profitability, good 1P reserve
life, a reserve replacement ratio above 100%, providing the necessary basis for
sustaining the production profile, and satisfactory liquidity, Fitch said.

 

DTEK Oil & Gas will extract 1.8 bcm of gas per
year on average in 2022-2024, down from 2.0 bcm in 2021E, Fitch assumes. The
natural gas prices at European hubs will amount to USD 159/tcm in 2021-2022 and
USD 177/tcm afterwards, according to Fitch. DTEK Oil & Gas will spend on
average UAH 2.4 bln (USD 86 mln) per year on CapEx, the agency assumes.

 

Fitch reclassified UAH 3,514 mln (USD 130 mln) of
reversal of net impairment loss on financial assets from operating profit to
non-operating items, according to the report. DTEK Oil & Gas reported in
its 2020 financial statements that the gains due to reversal of impairments
contributed UAH 3,126 mln (USD 116 mln) to its total UAH 8,119 mln (USD 301
mln) Adjusted EBITDA for 2020.

 

Fitch might raise its rating of DTEK Oil & Gas or
its outlook if the company increases its production levels and also if it
improves its corporate governance profile and makes its group structure more
transparent by maintaining a stable track record of limited amount of related-party
transactions on an arms-length basis and adheres to a conservative financial
policy, the report said. Conversely, Fitch might downgrade its rating or
outlook for the company if DTEK Oil & Gas’ corporate governance profile
weakens, including due to sizeable related-party transactions, the agency said.

 

If the company’s ratio of net debt to funds flow from
operations (FFO), which stood at 4.4x in 2020 according to Fitch, rises above
4.5x on a sustained basis, the agency might lower its rating or outlook.
Conversely, a drop of FFO net leverage below 3x on a sustained basis might lead
to a positive rating action or an upgrade, Fitch said.

 

Dmytro Khoroshun: Fitch’s
initiation is a reasonable starting point for DTEK Oil & Gas’ rating
history.

 

The company needs to establish its track record with
the rating agencies and the markets. Its rating profile might prove more
dynamic than for other Ukrainian issuers because of the volatile natural gas
markets and the current uncertainty around its future corporate governance
actions.