Fitch Expects to Rate YPF's Proposed Sr. Unsecured Bond Issuance 'B(EXP)'/'RR4'
KEY RATING DRIVERS
YPF's ratings reflect its strong linkage with the credit quality of the Republic of Argentina and the company's relatively low reserve life. YPF's 'B' ratings are linked to the sovereign rating of Argentina, which has a Long-Term Foreign and Local Currency Issuer Default Rating (IDR) of 'B'.
Fitch has assigned a country ceiling of 'B' to the Republic of Argentina, which limits the foreign currency rating of most Argentine corporates. Country Ceilings are designed to reflect the risks associated with sovereigns placing restrictions on private sector corporates, which may prevent them from converting local currency to any foreign currency (FC) under a stress scenario, and/or may not allow the transfer of FC abroad to service FC debt obligations. Since taking power in December 2015, the Mauricio Macri administration removed FX controls introduced in 2011 and increased the flexibility of the Argentine peso, which should contribute to improving the capacity of the economy to absorb external shocks and relieve pressure on international reserves.
LINKAGE TO SOVEREIGN: YPF's ratings reflect the close linkage with the Republic of Argentina resulting from the company's ownership structure as well as recent government interventions. The Republic of Argentina controls the company through its 51% participation after it nationalized the company in April 2012. Since this action, the company's strategy and business decisions are governed by the Republic.
LOW HYDROCARBON RESERVE LIFE: The ratings consider the company's relatively weak, though improving, operating metrics characterized by a low reserve life. As of year-end 2015, YPF reported proved reserves of 1,226 million barrels of oil equivalent (boe) and average production of 577,000 boe per day (52% crude oil). Based on production trends, the company's reserve life is below-optimal at approximately six years. This could create significant operational challenges in the medium - to long-term, and gives the company limited flexibility to reduce capex investments in order to increase upstream reserves/production.
STABLE PRODUCTION: As expected by Fitch, the company's production remained stable with an average production of 577,000 boe in 2015 (up 3% year-over-year). Capex investments for the second quarter of 2016 (2Q16) were approximately 38% lower in dollar terms compared with the same period of 2015. Despite the significant reduction in the company's capital expenditure program during 2016, Fitch expects the company to continue with its initial ambitious capex program to maintain stable production in 2016 and increase production in the following years. Production in 2Q16 averaged 582,300 boe per day, which was similar to 1Q15 production levels and in line with our assumptions.
STRONG BUSINESS POSITION: Fitch expects the company to continue to solidify its market leadership in Argentina. YPF benefits from a strong business position supported by its vertically integrated operations and dominant market presence in the Argentine hydrocarbons market. Fitch anticipates that YPF will continue to exercise an active role in domestic fuel and gas supply. In the downstream segment, where YPF enjoys a 56% market share of domestic gasoline and diesel sales, the company benefits from relatively high prices for refined products in Argentina.
ADEQUATE CREDIT PROTECTION METRICS: YPF has relatively solid credit protection metrics, characterized by moderate leverage and a manageable debt amortization schedule. For the LTM ended June 2016, net leverage, as measured by net debt-to-EBITDA, reached 2.1x (considering Fitch's calculated EBITDA for YPF in USD), which is still considered moderate for the assigned rating. YPF's total debt-to-total proved reserves ratio was USD7.5 per boe (USD 8.37 per boe including the USD750 million issued during 3Q16 and the proposed CHF300 million bond issuance).
As of June 30, 2016, YPF's total debt was approximately USD9.2 billion, and the company reported EBITDA for the LTM of USD4.67 billion. Fitch's calculated equivalent EBITDA in USD for the LTM ended June 30, 2016 was approximately USD4.2 billion. Fitch uses a weighted quarterly average USD/Peso exchange rate to convert YPF's financial results into U. S. dollar equivalent figures. Differences between the company's reported numbers and Fitch's figures arise given the high currency volatility experienced in Argentina over the past six months and the timing of sales and costs recognition.
Reported EBITDA for the 2Q16 was down 13% compared with 2Q15 as a result of lower domestic oil prices (10% lower) and significant currency devaluation. While the upstream segment benefitted from the devaluation, the downstream business was severely affected by the devaluation of the Argentine peso.
Fitch assumes production will remain stable during 2016 assuming flat EBITDA trends in 2016. During recent years, the company's leverage has been moderately increasing, mostly as a result of increases in debt to fund the company's ramped-up capital expenditure program. Fitch believes net leverage will remain close to 2.0x during 2016-2017 as a result of lower domestic prices, significant capex needs and pressure from local currency devaluation. These leverage levels are still considered moderate for the rating category. Incorporating the proposed bond issuance of up to CHF250 million and the USD750 million bond issued during 3Q16, the company's total debt-to-EBITDA ratio for the past 12 months would rise to 2.5x on a pro forma basis.
--Mid-single-digit production growth annually;
--Realized oil prices of USD61/bbl, which could marginally decline to mid-USD50/bbl range in the short - to medium-term;
--Natural gas prices increasing to the USD4.5/MMcf level over the next five years;
--Low-single-digit revenue growth in dollar terms over the next five years;
--Capex of approximately USD4.7 billion for 2016. Fitch conservatively assumes capex of USD4.5 billion per year during 2017-2019;
Future developments that could, individually or collectively, lead to negative rating actions in the short term:
--Argentina's economic deterioration and the company's inability to maintain an adequate liquidity position or access to foreign currency;
--Any further weakening of Argentina's fiscal accounts could have a negative impact on the companies' collections/cash flow;
--A significant deterioration of credit metrics;
--The adoption of adverse public policies that can affect the company's business performance in any of its business segments.
A positive rating action could occur as the result of an upgrade of the sovereign rating.
Total cash and equivalents amounted to approximately USD1 billion as of June 30, 2016. The company's liquidity position is further strengthened by the USD750 million proceeds received from the bonds issued on July 7, 2016 and the government bonds (BONAR 2020) related to the 2015 Plan Gas receivables. The company's liquidity position is considered adequate to cover its short-term debt due during 2016.
The company has been successful accessing the local and international markets, and given that the company is controlled by the Argentine government, Fitch does not anticipate any difficulties in accessing the debt markets to refinance short-term debt.
FULL LIST OF RATING ACTIONS
Fitch currently rates YPF S. A. as follows:
--Long-Term Foreign Currency IDR 'B'; Outlook Stable;
--Long-Term Local Currency IDR 'B'; Outlook Stable;
--Notes due 2018, 2020, 2021, 2024, 2025, 2028 'B'/'RR4'.