OREANDA-NEWS. Fitch Ratings' recent oil price deck revision will not directly affect the ratings of Russian oil and gas companies. However, low oil prices have increased the probability of tax increases, which could result in deteriorating credit metrics and selective downgrades. Some ratings are also capped by the 'BBB-' sovereign rating, which has a Negative Outlook as falling oil has contributed to economic weakness.

In February we lowered our price deck, which is the price assumption we use in corporate ratings, to USD35/bbl in 2016, USD45 in 2017, USD55 in 2018 and USD65 in the long term. While these lower assumptions will translate into higher projected leverages for the Russian O&G players, the increase will be moderate and largely offset by the flexible rouble exchange rate and the progressive tax regime.

We are now updating our corporate forecasts using the new price deck and expect to publish them shortly, after most companies have reported their 2015 results. Our preliminary modelling shows that key metrics will remain broadly within the range we see as appropriate for the current ratings, even in 2016, which we expect to be the bottom of the cycle.

The only exception is Gazprom Neft (BBB-/Negative), which may see its FFO adjusted net leverage rising above 2.5x, due to its ambitious capex programme and a high proportion of FX-denominated debt. However, this alone will probably be insufficient to trigger a negative rating action, as the leverage should improve after 2016 and because Gazprom Neft has strong legal ties with Gazprom.

Novatek's (BBB-/Negative) leverage should remain within the appropriate range for its rating. But the rating could be negatively affected by rising exposure to Yamal LNG if there are further delays in attracting project finance and the company keeps providing loans to the project.

Higher taxes could change the rating landscape, leading to higher leverage and weaker liquidity. The tax hike on the sector announced in October 2015 was relatively minor and will cost Russian oil companies 3%-7% of their dollar EBITDA, depending on oil prices. But a mineral extraction tax hike suggested by the Ministry of Finance in February would have more serious implications, including a more than 20% drop in EBITDA. In this scenario, companies would probably need to rely more on the Russian banking system for liquidity support and to slash capex. This could weaken them operationally.

We believe that under our price deck assumptions a further increases in taxes is likely. We assume that the moderate tax hike announced in October and initially labelled as a one-off measure will be replicated in 2017-19. However, any further increases are likely to be smaller than the Ministry of Finance's recent proposal and will be subject to a compromise between oil companies and the state; targeted tax breaks may also soften the blow.

These could be introduced to incentivise production across depleted brownfield sites, or to accelerate the start-up of greenfield sites that require significant upfront capital investment. Oil prices falling again below USD35/bbl for a protracted period of time would increase the probability of a bigger tax hike, due to the fiscal pressure.