"Romgaz's 'BBB-' rating benefits from a one-notch uplift from its 'bb+' Standalone Credit Profile (SCP) for state support, as per our Government-Related Entities (GRE) Rating Criteria," Fitch Ratings said in a statement on Tuesday.
The gas producer's SCP rating reflects its dominant position on the Romanian natural gas market as well as its upstream production growth potential thanks to the Neptun Deep and Caragele reservoir developments. Romgaz also benefits from a conservative financial policy, Fitch Ratings said. However, a comparatively modest production scale, lack of geographic diversification due to its sole focus on Romania, the aging nature of its legacy gas assets, large capex and manageable execution risk represent the key risks affecting the company's rating.
Romgaz is planning a eurobond issuance worth 1.5 billion euro ($1.63 billion) in order to finance its Neptun Deep reservoir project, local news outlet ZF.ro reported last week.
In the first quarter of 2024, Romgaz boosted its net profit by an annual 94% to 1.245 billion lei ($271.4 million/250.3 million euro), it said in a financial report filed with the Bucharest Stock Exchange last week.
Romgaz shares changed hands 0.18% higher at 55.2 lei as at 1008 CET on Friday on the Bucharest bourse.
Fitch further elaborated:
"KEY RATING DRIVERS
Large Capex Plans: 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 partners with OMV Petrom, Neptun Deep's operator. The development plan includes infrastructure of 10 wells and an offshore platform, with production expected to start in 2027, reaching a gross plateau production of approximately 8 billion cubic metres (bcm) annually. Romgaz and OMV Petrom will 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 by half 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 development of oil and gas projects.
Leverage to Temporarily Spike: 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 significant capex, particularly on Neptun Deep development. However, we expect net leverage to decline from 2027 as new projects contribute to EBITDA. Romgaz's financial policy assumes EBITDA net leverage below 2.0x across economic cycles, supporting the company's 'bb+' SCP.
'Very Strong' Decision-Making and Oversight: Romanian government exercises significant control over Romgaz's decision-making, including its operational activities, financial performance, funding structure, and investment plans. This control is evident through the government's 70% ownership stake, and its oversight is robust, with Romgaz being subjected to frequent, periodic reporting on key operating and financial indicators. We therefore view the score for 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 Romanian gas storage network and electricity generation are integral to the national economy, and its default would impact the continued provision of a key public service. Moreover, Romgaz is involved in strategic projects like Neptun Deep, which further underscores its importance to the country's energy landscape.
Bottom-up Plus One Approach: We view Precedents of Support and Contagion Risk as 'Not strong enough'. We therefore calculate Romgaz's GRE score at 22.5 points. Combined with the 'bb+' SCP, this leads to the SCP plus one notch rating approach, resulting in the 'BBB-' rating.
Strategy Focused on Higher Production: Romgaz's 2021-2030 strategy focuses on enhancing the value of its core activities, natural gas production and trading, while pursuing decarbonisation. Key strategic goals include reducing carbon and methane by at least 10%, limiting annual natural gas production decline from legacy assets to below 2.5%, maintaining an EBITDA margin of 25-40%, and achieving a return on average capital employed of 12% or higher. Romgaz also plans to reach net zero CO2 emissions by 2050.
Generous Dividend Payments: Romanian state-owned enterprises have historically been required to distribute at least 50% of net profits as dividends. For 2023, Romgaz was authorised by the government to allocate only 20% of its profits for dividends in 2024 due to anticipated large capex, which is in line with exemptions from dividend policy for state-owned companies realising major energy projects. We expect that Romgaz will return to its standard, higher dividend distributions in 2025. However, the extension of lower dividend payments during Neptun Deep development cannot be ruled out and would represent an upside to our forecasts.
Regulated Gas Prices: In response to the Russia-Ukraine war, the Romanian government implemented regulations to protect consumers in the gas supply market that expire in March 2025. In 2023, 87% of Romgaz's gas sales were at regulated prices of RON150 per megawatt hour (MWh) or USD9.6 per thousand cubic feet (mcf). From April 2024, the capped price reduced to RON120/MWh. Sales at these regulated prices are exempt from windfall taxes, and royalties are based on capped prices. We assume the measures will not be extended, but the impact of an alternative scenario on Romgaz's financials would be positive due to lower taxation from regulated prices.
CCGT Plant in Construction: Romgaz is advancing construction of the Iernut combined-cycle gas turbine (CCGT) power plant, with RON344 million capex, to be completed by December 2024. Romgaz plans to benefit from sales of electricity on the balancing market, which is expected to increase in importance as renewable electricity generation increases with its inherent output volatility. We expect Iernut CCGT to constitute around 7% of Romgaz's EBITDA in 2027 increasing the company's business diversification, albeit with the upstream segment still the dominant cash flow contributor.
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 being larger in scale, with production expected to increase from over 100 kboe/d to approximately 185 kboe/d by 2025, 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 before royalties and is subject to a more advantageous tax regime, although this is counterbalanced by security concerns 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 capital expenditures for Neptun Deep ramp-up. In contrast, Energean is currently in a deleveraging phase as it transitions from growth capex to the production phase of greenfield projects.
KEY ASSUMPTIONS
Fitch's Key Assumptions within the Rating Case for the Issuer:
- Natural gas production evolution in line with management guidance
- Title transfer facility (TTF) gas prices at USD10/mcf in 2024, USD10/mcf in 2023, USD8/mcf in 2026, USD7/mcf in 2027 and USD5/mcf after
- Oil prices at USD80/bbl in 2024, USD70/bbl in 2025, USD65/bbl in 2026-2027 and USD60/bbl after
- 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 Positive Rating Action/Upgrade
- An upgrade is unlikely at least in the short term unless there is a material improvement in Romgaz's business profile through diversification, or a significant increase in upstream production beyond the currently forecast level after Neptun Deep and Caragele development while maintaining a conservative financial profile
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Negative rating action on Romania's sovereign rating
- Weaker ties with the sovereign
- Problems in 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
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Romgaz's liquidity needs for 2024 are covered through cash on balance sheet. Beyond 2024, we expect Romgaz to raise debt to fund its increased capex.
ISSUER PROFILE
Romgaz is 70% state-owned and 30% publicly traded on the Bucharest Stock Exchange and carries out operations in oil and gas upstream, gas storage and supply and electricity generation. Romgaz's 2023 production amounted to 83kboe/d, while Fitch adjusted EBITDA totalled RON5.6 billion.
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 incorporates a one-notch uplift for state support."
