Fitch Ratings has affirmed Uzbekneftegaz's (UNG) Long-Term Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook. However, the rating agency has revised down UNG's Standalone Credit Profile (SCP) to 'b' from 'b+' due to weaker-than-expected profitability, projected slower deleveraging, consistently tight liquidity, and a recent interest coverage covenant breach.
UNG's rating is equalized with that of its parent, Uzbekistan (BB-/Stable), reflecting strong ties with the government. The state is the sole ordinary shareholder of UNG, with plans to sell a minority stake to outside investors. Approximately 65% of UNG's consolidated debt was guaranteed by the state at the end of 2022.
The socio-political impact of UNG's default is deemed 'Very Strong' due to its vital role in providing gas and liquid hydrocarbons domestically. UNG's default would significantly affect Uzbekistan's power generation, heating, and automobile fuel supply.
UNG breached the interest cover covenant under its $200mn club loan based on 1H23 results but received a waiver. Weaker-than-expected performance, especially from the GTL plant, and increased interest charges contributed to the downgrade of UNG's Standalone Credit Profile (SCP) to 'b.'
UNG's leverage is expected to improve from 2025 with the operationalization of the gas-to-liquids (GTL) plant. The SCP remains under pressure due to operational risks, tight liquidity, potential covenant breaches, and the risk of slower deleveraging.
Liberalized oil product prices and planned gas price liberalization could boost UNG's profitability. UNG's legacy guarantees, mainly from its former subsidiary Uztransgaz, are being addressed through a cash-neutral transaction.
In terms of assumptions, Fitch considers upstream volumes to remain broadly stable, a moderate increase in domestic gas prices, and Brent oil price projections from $80/bbl in 2023 to $65/bbl in 2026. Annual capex and dividend projections are also factored into the analysis.
Positive factors for UNG's rating include a sovereign upgrade and sustained EBITDA net leverage below 3.5x. Negative factors include a sovereign downgrade, EBITDA net leverage sustained above 4.5x, and unremedied breaches of financial covenants.
UNG's projected liquidity is weak, with a liquidity score of 1.1x in 2023 and below 1x in 2024. The company raised $1bn through selling industrial gas facilities to Air Products, supporting liquidity.
Earlier Daryo during a visit to the central office of Uzbekneftegaz on November 22, President Shavkat Mirziyoyev thoroughly evaluated the winter readiness of the energy system. The presidential press service highlighted substantial investments totaling UZS 14.5 trillion (approximately $1.2bn) made throughout the year to improve the energy sector.
UNG is Uzbekistan's national oil and gas company, producing and selling natural gas, condensate, oil, oil products, and petrochemicals domestically.
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