Rating Action Commentary
ֳ Revises Romanian Romgaz's Outlook to Negative; Affirms 'BBB-' Rating
Mon 23 Dec, 2024 - 12:13 PM ET
ֳ - Warsaw - 23 Dec 2024: ֳ has revised Romanian S.N.G.N. Romgaz S.A.'s (Romgaz) Outlook to Negative from Stable and affirmed its 'BBB-' Long-term Issuer Default Rating (IDR).
The revision of the Outlook follows a recent similar action on the sovereign rating of Romania (see "ֳ Revises Romania's Outlook to Negative; Affirms at 'BBB-'" dated 17 December 2024). Romgaz's 'BBB-' rating benefits from a one-notch uplift from its 'bb+' Standalone Credit Profile (SCP) for state support, under our Government-Related Entities (GRE) Rating Criteria. A downgrade of Romania would be mirrored on Romgaz's IDR.
The SCP reflects Romgaz's dominant position in Romania's natural gas market, upstream production growth potential from the Neptun Deep and Caragele reservoir developments and a conservative financial policy. Key rating constraints include its comparatively modest production scale, lack of geographic diversification, due to its sole focus on Romania, its aging legacy gas assets, and large capex.
Key Rating Drivers
Large Capex Plan: Romgaz has ambitious plans to develop Neptun Deep, a deepwater offshore project in the Romanian Black Sea. Romgaz acquired a 50% stake in the project from Exxon Mobil for EUR1 billion in 2022 and is in partnership with OMV Petrom, Neptun Deep's operator. The development plan includes the infrastructure of 10 wells and an offshore platform, with production expected to start in 2027, reaching a gross peak output of around 8 billion cubic metres (bcm) annually. Romgaz and OMV Petrom will jointly invest up to EUR4 billion in the project.
Transformational Project: We view Neptun Deep as a transformational project for Romgaz. It will allow Romgaz to increase natural gas production to around 150 thousand barrels of oil equivalent per day (kboe/d) from 83 kboe/d in 2023, halting a declining production trend from existing mature reservoirs. The project will also secure Romania's energy independence and position the country as the EU's largest natural gas producer from domestic resources. We view execution risk as manageable, given the partner's experience in oil and gas project development.
Leverage to Temporarily Rise Higher: Romgaz has historically operated with a net cash position, reflecting its prudent financial management. We forecast EBITDA net leverage will rise through 2026, due to large capex, particularly on the Neptun Deep development. However, we expect net leverage to decline from 2027 as new projects contribute to EBITDA. Romgaz's financial policy aims for an EBITDA net leverage below 2.0x across economic cycles, supporting its 'bb+' SCP.
'Very Strong' Decision-Making and Oversight: The Romanian government exercises significant control over Romgaz's decision-making on its operational activities, financial performance, funding structure, and investment plans. This influence is highlighted by the government's 70% ownership stake. The oversight is robust, with Romgaz required to make frequent, periodic reporting on key operating and financial indicators. We therefore view decision-making and oversight as 'Very Strong'.
Preservation of Government Policy Role: We assess the preservation of government policy role as 'Strong', due to Romgaz's pivotal role in energy self-sufficiency and security for Romania. Romgaz's natural gas production, ownership of Romania's gas storage network, and electricity generation are vital to the national economy. A default by Romgaz would disrupt the continued provision of a key public service. Moreover, Romgaz's involvement in strategic projects like Neptun Deep further highlights its importance to the country's energy sector.
Bottom-up Plus One Approach: We view precedents of support and contagion risk as 'Not Strong Enough'. We therefore score Romgaz at 22.5 for support, out of a maximum 60. Combined with the 'bb+' SCP, this leads to a bottom-up plus one notch rating approach, resulting in the 'BBB-' rating, which is equal with the sovereign rating. This means a downgrade of the sovereign rating of Romania would be reflected in Romgaz's IDR.
Derivation Summary
Energean plc (BB-/Stable) is Romgaz's closest peer, although Romgaz has a more diversified profile with its gas storage and electricity generation, as opposed to Energean's focus on upstream operations. Despite Energean's larger scale, with a 2023 production of 123kboe/d, it has lower realised prices in the Israeli gas market, compared with Romgaz's European gas price environment. However, Energean has a more favourable cost of production and is subject to a more advantageous tax regime, although this is counterbalanced by security risks in light of the ongoing war between Israel and Hamas.
Historically, Romgaz has maintained a strong financial profile with a net cash position, but this is anticipated to change as growth capex for Neptun Deep's rises. In contrast, Energean is currently in a deleveraging phase as it shifts from growth capex to the production phase of new projects.
Key Assumptions
ֳ's Key Assumptions within the Rating Case for the Issuer
- Natural gas production in line with management guidance
- Oil and gas prices in line with ֳ's oil and gas price deck
- Capex in line with management guidance
- Dividends at around 50% of previous year net income from 2025
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-- A downgrade of Romania's sovereign rating
-- Weaker ties with the sovereign
-- Problems in the development of new upstream assets or EBITDA net leverage well above 2.0x after the capex-intensive period would be negative for the SCP and the IDR
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-- The Negative Outlook makes an upgrade unlikely at least in the short term unless Romgaz's business profile materially improves through diversification, or its upstream production, after Neptun Deep and Caragele development, improves beyond the currently forecast levels, while maintaining a conservative financial profile
For Romania's rating sensitivities, see 'ֳ Revises Romania's Outlook to Negative; Affirms at 'BBB-'' published 17 December 2024 on .
Liquidity and Debt Structure
We expect Romgaz's liquidity needs for 2024 to be covered by cash on its balance sheet and committed revolving credit lines. Beyond 2024, we expect Romgaz to raise debt to fund its increased investment needs.
Issuer Profile
Romgaz is 70% state-owned and 30% publicly traded on the Bucharest Stock Exchange. It has operations in upstream oil and gas production, gas storage and supply, and electricity generation.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Romgaz's rating is linked to the Romanian sovereign's rating.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
to access ֳ's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. ֳ's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
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PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| S.N.G.N. Romgaz S.A. | EU Issued, UK Endorsed |