The Rompetrol Group is based in the Netherlands but its main asset is Romania's Rompetrol Rafinare, which operates two refineries.
"The outlook revision follows TRG's completion, in mid-August 2012, of its multiyear project to upgrade the Petromidia oil refinery in Romania. The group is ramping up production at the modernized refinery," S&P said in a statement on Wednesday.
The agency also said in the statement:
"The outlook revision largely reflects our view that TRG's production volumes and yield will both rise, thanks to increased utilization rates and its production of more valuable products. Over a full year of operations, we understand that the upgrade could increase production by 20%-25%, equal to about an extra million tons (mostly diesel) a year. The refinery upgrade required material funding support from TRG's parent, Kazakhstan-based JSC NC KazMunayGas (KMG; BBB-/Stable/--), and we believe KMG will continue to provide support to TRG as needed.
TRG's main operating assets are located in the Republic of Romania (local currency BB+/Stable/B; foreign currency BB+/Stable/B). The rating on TRG reflects our opinion of the group's "vulnerable" business risk profile and "highly leveraged" financial risk profile.
We assess TRG's stand-alone credit profile (SACP) at 'ccc+'. We factor two notches of uplift from the SACP into the long-term corporate credit rating on TRG for extraordinary parental support from the group's 100% shareholder, KMG. We do not equalize our rating on TRG with KMG's SACP of 'b+' because TRG is a foreign investment of KMG and we differentiate between KMG's support for its domestic and foreign investments.
In our view the group's funding needs are likely to decline in the next year as recent negative free cash flow improves thanks to lower capital investments and increased production at the upgraded Petromidia refinery. We anticipate that TRG's free cash flow will also improve thanks to the currently strong refining margins for refineries in the Mediterranean basin. We believe these factors provide an economic incentive for parental support, should TRG require it for funding liquidity or additional investments in marketing or other activities.
We could lower the rating if TRG materially increases capital investment and Europe experiences a severe recession. Such a scenario, which is not our base case, would soften demand for refined products and could cause TRG's free operating cash flow deficit to increase, while at the same time, TRG's banks could withdraw its uncommitted credit facilities. This severe scenario could impair KMG's ability to provide financial support to TRG and would
consequently threaten TRG's credit quality, particularly if oil prices were to drop.
We do not see potential for rating upside at this stage, given the low likelihood that we would equalize the long-term corporate credit rating on TRG with KMG's SACP of 'b+'. A positive rating action could be triggered in the longer term by a material improvement in TRG's underlying assets."
