Empresa Nacional del Petroleo

Summary:
Empresa Nacional del Petroleo
Primary Credit Analyst:
Cecilia L Fullone, Buenos Aires (54) 114-891-2170; [email protected]
Secondary Contact:
Fabiola Ortiz, Mexico City (52) 55-5081-4449; [email protected]
Table Of Contents
Initial Analytical Outcome ("Anchor") And Rating Result
Rationale
Outlook
Standard & Poor's Base-Case Scenario
Business Risk
Financial Risk
Liquidity
Other Modifiers
Ratings Score Snapshot
Related Criteria And Research
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Summary:
Empresa Nacional del Petroleo
BBB-/Stable/--
Corporate Credit Rating
Profile Assessments
BUSINESS RISK
FAIR
Vulnerable
FINANCIAL RISK
Excellent
HIGHLY LEVERAGED
Highly leveraged
Minimal
Initial Analytical Outcome ("Anchor") And Rating Result
Our 'BBB-' rating on Empresa Nacional de Petroleo (ENAP) is derived from:
• Our anchor of 'b' based on our "fair" business risk and "highly leveraged" financial risk profile assessments for the
company;
• On an aggregate basis, no impact from modifiers. The one- notch negative adjustment due to quality of capital
structure offsets the one-notch positive adjustment as a result of the company's "positive" comparable rating
analysis; and
• Five notches of uplift from the 'b' stand-alone credit profile (SACP), reflecting our view that there is a very high
likelihood that the Republic of Chile (foreign currency: AA-/Stable/A-1+; local currency: AA+/Stable/A-1+) would
provide timely and sufficient extraordinary support to the company in the event of financial distress.
Rationale
Business Risk: Fair
Financial Risk: Highly leveraged
• Strong dominant position in the domestic refining
market;
• Exposure to volatile commodity prices and refining
margins; and
• Below average profitability compared with its
international peers.
• Generally weak profitability and cash-flow
generation; and
• Very high debt levels that result in weak capital
structure.
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Summary: Empresa Nacional del Petroleo
Outlook: Stable
The stable outlook reflects our expectation that ENAP will continue to play a very important role in Chile's energy
policy.
Downside scenario
Unless we perceive that ENAP has become less important to the Chilean government, a downgrade is unlikely.
ENAP's SACP would have to drop by two notches (to below 'b-') in order to lead to a downgrade.
Upside scenario
Any rating upside is limited at this point, and would depend on a significant improvement in the company's SACP,
for example, if it's able to materially reduce debt.
We might raise the SACP by one notch if the company generates positive free operating cash flow on a sustained
basis.
Standard & Poor's Base-Case Scenario
Our base case suggests that the firm's free operating cash flows will be marginally positive in 2014, and probably turn
negative in 2015. As a result, we believe it is unlikely that the company will lower its debt significantly, nor do we
expect it to improve its financial metrics unless the company receives a capital infusion from the government.
Assumptions
• Average actual product price that ultimately
depends on our long-term assumptions for Brent
crude oil at $100 per barrel in 2014 and $95 per
barrel in 2015;
• Adjusted EBITDA margin of about 5%;
• Annual capital investments for approximately $300
million in 2014 and 2015; and
• No material debt reductions.
Key Metrics
FFO/Debt
2013A
2014E
2015E
7%
5%-10%
0%-5%
Debt/EBITDA
6.6x 7.0x-9.0x 8.0x-10.0x
FOCF (Mil. $)
236
(50)-100
(150)-(50)
A--Actual. E--Estimate.
Business Risk: Fair
We assess ENAP's business risk profile as "fair" mainly reflecting its inherent exposure to the volatility and cyclicality
in refining margins, which is partially compensated by the company's strong competitive position in the domestic
market.
ENAP enjoys a dominant position in Chile, being the leading supplier of the domestic market and holding 100% of
Chile's refining capacity. We expect ENAP to maintain its dominant refining position in Chile given the fact that the
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Summary: Empresa Nacional del Petroleo
construction of a new refinery in Chile is unlikely. Additionally, because the company already operates under an
import parity price regime, pricing pressures from increased imports should not have a significant impact on margins.
During 2013, ENAP produced 73.3 million barrels of refined products, representing a 63% market share. Imports from
the international spot market provide the remainder. Growth in Chile's refined product market will likely continue to be
linked to economic growth.
Despite having its own E&P operations, ENAP is dependent on and exposed to crude oil imports (mainly from Brazil,
Colombia, Ecuador and Argentina). ENAP's domestic production is insufficient for the company's crude oil needs, and
we do not expect this to change significantly in the next few years. In 2013, ENAP produced 19.2 million boe (66% oil,
34% gas). Its proved reserves were 118 million boe as of Dec. 31 2013.
Financial Risk: Highly leveraged
ENAP's weak profitability, high debt and generally very limited or negative free operating cash flow generation
underpins its "highly leveraged" financial risk profile. In 2013, ENAP improved its operating performance, although its
debt levels continued to be high. The company's adjusted EBITDA rose to $544 million from negative levels in 2012,
as the company implemented measures to improve its efficiency. In addition, in 2013, and as part of its strategy to
divest non-strategic assets, ENAP sold its 49% stake in its fuel distribution business in Peru and Ecuador for $308
million. The company used the funds from the sale to reduce debt, which was $4 billion as of Dec. 31, 2013, compared
with $4.3 billion a year earlier.
Liquidity: Less than adequate
Qualitative aspects included in our assessment
As we expect the firm's free cash flow to be just marginally positive in the next 12 months, there will likely be no room
for significant debt reduction unless ENAP receives a capital infusion from the government. Therefore, we believe
ENAP will continue to refinance most of its short-term maturities. We do not see this as a major risk given the
company's very strong access to refinancing markets and sound relationship with banks.
Principal Liquidity Sources
Principal Liquidity Uses
• As of Dec. 31, 2013, ENAP had about $469 million
in cash and short-term investments; and
• Positive funds from operation were $200 million to
$300 million.
• As of Dec. 31, 2013, ENAP's short-term maturities
totaled $485 million; and
• Capital expenditures (capex) will be about $300
million in 2014; however, we believe ENAP might
lower its capex to $200 million if there is a severe
industry or financial market downturn.
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Summary: Empresa Nacional del Petroleo
Other Modifiers
We assess the company's quality of capital structure to be "negative," due to its debt maturities concentration within a
five-year time horizon in relation to its liquidity sources and the company's leverage profile.
On the other hand, we assess our comparable rating analysis on ENAP as positive, because the company's access to
credit markets exceeds that of other issuers in the same rating category, due to its government ownership.
On an aggregate basis, the modifiers do not have an impact on the rating.
Ratings Score Snapshot
Corporate Credit Rating: BBB-/Stable/-Business risk: Fair
• Country risk: Low
• Industry risk: Moderate
• Competitive position: Fair
Financial risk: Highly leveraged
• Cash flow/Leverage: Highly leveraged
Anchor: b
Modifiers
•
•
•
•
•
•
Diversification/Portfolio effect: Neutral
Capital structure: Negative (-1 notch)
Liquidity: Less than adequate ("no impact")
Financial policy: Neutral ("no impact")
Management and governance: Fair ("no impact")
Comparable rating analysis: Positive (+1 notch)
Stand-alone credit profile: b
• Sovereign rating: foreign currency: AA-/ Stable/A-1+; local currency: AA+/Stable/A-1+
• Likelihood of government support: Very high, (+5 notches from SACP)
Related Criteria And Research
Related Criteria
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Jan. 2, 2014
• Key Credit Factors For The Oil And Gas Exploration And Production Industry, Dec. 12, 2013
• Corporate Methodology, Nov. 19, 2013
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Summary: Empresa Nacional del Petroleo
• Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
• Key Credit Factors: Criteria For Rating The Global Oil Refining Industry, Nov. 28, 2011
• Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
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