S&P affirms Nostrum Oil & Gas Finance B.V (Kingdom of Netherlands) ratings; outlook Stable

/Standard & Poor's, London, April 16, 14, heading by KASE/ – Standard & Poor's Ratings Services affirmed its 'B+' long-term corporate credit rating on Kazhakstan-based hydrocarbons exploration and production company Nostrum Oil & Gas L.P. The outlook is stable. We also affirmed our 'B+' long-term issue rating on the company's senior notes. We affirmed our ratings on Nostrum because we continue to think that the company will maintain its operational performance on the back of near full capacity production of about 45,000 barrels of oil equivalent per day (boepd), and strong credit metrics for the rating over our 2014-2016 forecast horizon. We revised our assessment of Nostrum's financial policies to "neutral" from negative." We continue to consider Nostrum's financial policies to be potentially aggressive, which is illustrated by a track record of higher-than-expected dividend payouts and share buybacks. However, we no longer see a high risk of these policies affecting the predictability of the company's credit metrics or depressing key credit ratios over the forecast period, partly because of material cash on hand that we do not net against debt. We recognize that those activities were financed by operating cash flows and available cash in 2013, and we think the company will continue this trend to a large extent over the next few years. We also anticipate that Nostrum will adhere to its financial policies of maintaining reported net debt to EBITDA at or below 1.5x and paying dividends of about 20%-25% of net income. Our assessment of Nostrum's "significant" financial risk profile reflects its robust Standard & Poor's-adjusted credit metrics, coupled with our perception of potentially volatile cash flows and negative free operating cash flow (FOCF). In 2014, we anticipate adjusted funds from operations (FFO) to debt of 30%-45% and adjusted debt to EBITDA of about 2x. In 2015, we believe that FFO to debt is unlikely to drop significantly below 30%, and adjusted debt to EBITDA is unlikely to rise substantially above 2.5x. We forecast at least $400 million of planned capital expenditures in both 2014 and 2015. This includes some ongoing extensive drilling activities and spending on phase two of investment in a new gas treatment facility (GTF), which should account for almost half of total capital expenditures for 2014-2015. We think this will result in material negative FOCF of between $100 million and $200 million. We note that Nostrum has reduced its interest burden, extended its debt maturities, and diversified its funding sources over the past few years by successfully issuing notes in 2012 and 2014. Our "weak" business risk profile assessment for Nostrum reflects our view of the company's concentrated asset base; its dependence on one pipeline for dry gas (the company uses another pipeline for crude oil and stabilized condensate, but it could also use trucks as an alternative); its relatively small operations by international standards; and inherent risks relating to the oil industry and operating in Kazakhstan. These factors are somewhat mitigated by good profitability (including our assumption of a continued adjusted EBITDA margin of above 55% in 2014-2016) on the back of supportive oil prices, a favorable cost structure based on a modern asset base, low cash-lifting costs, and a supportive tax regime. We also view the part-ownership of Nostrum's local partner, Kazakhstan-based engineering company KazStroyService, as a supporting factor. Our "negative" comparable ratings analysis score is based on our view of the company's material negative FOCF and high asset concentration relative to that of its peers. The stable outlook on Nostrum reflects our expectation of FFO to debt sustainably between 30% and 45%, on the back of near full capacity production of about 45,000 boepd, coupled with our assumption of negative FOCF not surpassing negative $200 million per year. We anticipate that the company will adhere to its financial targets and we expect continued "adequate" liquidity. We would consider raising the ratings if Nostrum's production increases materially and if the company ramps up phase two of its GTF on time and without major cost overruns. Furthermore, we would consider a positive rating action if the company could sustain FFO to debt above 45%, with positive FOCF. Additional support for an upgrade would come from enhanced diversification of the producing asset base. We could consider lowering the ratings if Nostrum's production levels became considerably lower than we currently envisage, either because of depletion of fields or operational disruption, leading to FFO to debt of consistently less than 30%; or if we consider that the company's liquidity were becoming "less than adequate," which is not included in our base case. Any political or regulatory changes in Kazakhstan that impaired the company's taxes or constrained its operations could also lead to negative pressure on the ratings. Primary Credit Analyst: Christophe Boulier, London (39) 02-72111-226; christophe.boulier@standardandpoors.com Secondary Contact: Simon Redmond, London (44) 20-7176-3683; simon.redmond@standardandpoors.com Recovery Analyst: Kathryn Archibald, London (+44) 2071767117; kathryn.archibald@standardandpoors [2014-04-22]