S&P revises outlook on MOL Hungarian Oil and Gas to positive

STOCKHOLM: S&P Global Ratings has revised outlook on MOL to positive from stable and affirmed ‘BBB-‘ ratings on MOL and its senior unsecured debt on MOL Hungarian Oil and Gas PLC, which intends to fund its acquisition of certain Chevron assets in Azerbaijan from available liquidity sources.

Decreasing reserves and relatively limited prospects for organic growth in the upstream segment have been key weaknesses of MOL’s business risk profile in previous years. As such, S&P sees MOL’s announcement that it will acquire Chevron’s 9.57% stake in the Azeri-Chirag-Gunashli oilfield in Azerbaijan, and an effective 8.9% stake in the Baku-Tbilisi-Ceyhan pipeline, as an important step in replacing and increasing its hydrocarbon reserves. “We also consider that the acquisition will significantly boost MOL’s daily oil and gas production by 15%-20%”.

However, it will not increase proven and probable (2P) reserves to the 2009 peak of 665 million barrels of oil equivalent (mmboe). 2P reserves are projected to reach 360 mmboe-380 mmboe by the end of 2020 with the acquisition, compared with 324 mmboe at year-end 2018.

The weakening of reserve life would therefore slow, but additional growth initiatives would be required to reach the set target of 500 mmboe. “Furthermore, we note the high visibility of cash flows from the BP-operated giant mature field with a long reserve life. The production-sharing agreement between the State Oil Company of Azerbaijan Republic (SOCAR) and contractors limits sensitivity to oil price variations due to the oil cost compensation and 75%/25% split of profit oil. In other words, less upside and downside but, overall, more stability”.

The addition of the new assets will increase MOL’s resilience to business cycles, since its business mix will become more balanced. The share of upstream activities will rise to about 50% (nine months EBITDA 2019 pro forma) from 43%, making the company less sensitive to volatile European refining margins. “We therefore expect to reassess MOL’s business risk profile to satisfactory after the transaction closes”.

MOL will fund the total consideration of $1.57 billion from available liquidity, which includes $650 million of cash and $3.4 billion from committed credit facilities. Although the transaction is relatively large, we expect only a moderate impact on MOL’s credit metrics, with funds from operations (FFO) to debt in the 50%-60% range over the next two years since the assets will continue to generate positive FOCF, even at materially lower oil prices.

The positive outlook indicates that MOL’s stronger business resilience and diversity, provided by the acquisition, alongside gradual deleveraging could lead to a higher rating in the next 24 months. At this point, S&P sees at least a one-in-three chance that, over that period, the ratio of FFO to debt may improve beyond base-case expectation, due to the favorable market environment, the impact of IMO 2020, and the company’s financial policy decisions regarding capex and dividends.

“We could revise the outlook to stable if large capex and dividends or lower oil prices lead to significant negative discretionary cash flow (DCF), and FFO to debt declines toward 50% on average. We would consider this level to be commensurate with the ‘BBB-‘ rating if MOL’s business risk profile strengthens. If the transaction does not close, leaving continued uncertainties regarding the reserve replacement or if the lawsuit with the Croatian government over jointly owned INA is unfavorable for MOL, we would likely revise the outlook to stable.

“We could raise the rating if the acquisition goes through as planned, supporting the diversity and resilience of MOL’s business, and MOL deleverages, with FFO to debt at about 60% through the cycle. This would also require cash flows after capex and dividends to be at least neutral”.

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