(Moody’s 24.Jun.2019) — Moody’s Investors Service (“Moody’s”) has assigned a B2 rating to YPF Sociedad Anonima’s (YPF) proposed senior unsecured notes due 2029. The issuance volume will be in line with benchmark size. The outlook is stable.
Net proceeds from the proposed issuance will be used for liability management, capital spending and working capital requirements.
The rating of the proposed notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody’s to date and assume that these agreements are legally valid, binding and enforceable.
Rating assigned:
Issuer: YPF Sociedad Anonima
– Senior unsecured 10-year notes due 2029: B2
RATINGS RATIONALE
YPF’s B2 ratings reflect the company’s large oil and gas production and reserve size, solid cash generation and credit metrics for its rating category. The ratings also reflect YPF’s status as the largest industrial corporate and energy company in the domestic market, where it generates the bulk of its revenue, and its links with the government of Argentina (B2 stable), its controlling shareholder.
The ratings are mainly constrained by YPF’s concentration of operations in Argentina, a moderate-to-high foreign-currency risk given that most of the company’s debt is denominated in foreign currency, its portfolio of majority mature producing fields and its rigid labor cost structure.
YPF’s ratings combine its underlying b2 Baseline Credit Assessment (BCA), which expresses a company’s intrinsic credit risk, and our view of moderate support from and high dependence on the government of Argentina (B2 stable). YPF’s b2 BCA incorporates its vulnerability to the local energy policy framework and economic environment and its rigid labor cost structure. It also takes into consideration our belief that the company’s credit metrics will remain strong for the B rating category through the next 12-18 months.
In addition, YPF’s ratings reflect the application of Moody’s joint default rating methodology for government-related issuers (GRI) and considers the close relationship between the company and the government of Argentina, its controlling shareholder. Moody’s view includes the assumptions of i) moderate likelihood of extraordinary government support to YPF in case of need and ii) high default correlation between the company and the government. The government of Argentina’s ability and willingness to provide support to YPF is measured by the former’s B2 local currency rating and stable outlook as well as YPF’s majority government ownership and control, in addition to the importance of the company to the Argentine economy, where it holds a dominant market position in the energy sector. In turn, while YPF accounts for only a small part of the government’s revenue base, the high default correlation assumption reflects the tendency of the company and the government to be jointly susceptible to adverse circumstances that simultaneously move them closer to default. For instance, YPF derives the majority of its revenues domestically; in addition, the company and the government both share common exposure to foreign exchange rate risk.
YPF is Argentina’s largest integrated oil and gas company and the largest oil and gas producer in Argentina at 513 thousand barrels of oil equivalent per day (Mboe/d) in 2018 (note: natural gas figures include Moody’s conversion rate of 6,000 million cubic feet = 1 boe, which differs from the company’s), representing around 40% of Argentina’s total. As of December 2018, the company had proved oil and gas reserves of 1,051 million barrels of oil equivalent (MMboe), up 17% from 2017, equivalent to a reserve life of 5.8 years with a reserve replacement ratio of 182%. In the downstream business, YPF controls half of Argentina’s refining industry, with total operating capacity of about 320 thousand barrels per day (bpd) as of March 2019. It also operates the largest retail system in Argentina, with over 1,500 branded gas stations, which constitute about 35% of the total gasoline service stations in the country.
YPF’s 5-year business plan is focused on production growth at a compound annual growth rate of 5%-7% in 2019-23, mainly through unconventional resources -shale oil and gas production was up 57% in 2018-, which should lead to stronger cash flow generation and help maintain stable leverage. Since 2015, a reduction in well costs and falling operational and development costs have improved shale oil productivity and profitability at YPF’s Loma Campana block in Vaca Muerta. YPF’s development costs fell to around $11.4/bbl in 2018, down 58% since 2015, with operating costs down 58% to $6/bbl. YPF expects to reduce development costs by an additional 27% by 2023, and operating costs by 14%.
YPF has not tapped the local or international bond markets since late 2017 and has paid off the majority of long-term debt amortizations with its own cash generation, which explains the $1.7 in adjusted debt reduction since December 2017 to $9.4 billion as of March 2019. The funds from the proposed notes’ issuance will support the company’s liability management in 2019, while the company aims to finance its capital spending program mostly with its own cash generation. YPF’s cash flow generation remained strong in the last twelve months as of March 2019, with cash from operations (CFO) as adjusted by Moody’s at $3.9 billion, above $3.7 billion in cash requirements for capital spending, returning a positive free cash flow generation of $343 million. We expect CFO to remain at around $4.0 billion in 2019-20, supporting YPF’s $3.5-4.0 billion in annual capital spending needs. Pro forma the transaction, we expect Moody’s adjusted debt to EBITDA ratio to raise to around 2.8x as of year-end 2019, up from 2.6x as of March 2019, and interest coverage as measured by EBITDA to interest expense to lower to around 3.9x, from 5.0x in 2018.
The company’s liquidity profile is adequate today and will improve pro forma the transaction, with no significant maturities until 2021. As of March 2019, YPF’s cash balances of $1.6 billion was just below the $1.9 billion of adjusted debt coming due through the next 12 months, including $944 million in trade finance facilities which are typically rolled over. Cash proceeds from the proposed transaction will fund fully or in part $606 million in corporate notes due in the next twelve months as of March 2019, including a CHF300 million in bonds due in September. Most of the company’s cash is denominated in US dollars. The company has demonstrated ample access to both local and international capital markets to conduct liability management.
YPF has a weak export profile, as exports represented 10% of revenues as of March 2019, similar to previous years. The company’s foreign-currency risk is considered moderate-high because 90% of its debt is denominated in foreign currency. About 40% of its capital spending and operating costs are denominated in US dollars, but 45% of its revenues are generated in US dollars.
YPF’s stable outlook reflects our assumption that in the next 12 to 18 months the company’s credit metrics will remain around current levels, which are solid for a B rating category. We believe that YPF’s main shareholder, the Argentine government, (1) will exert no influence over the company to spend in capital spending or dividends beyond its operating cash flow generation capacity, and (2) has incentives to maintain prices of crude and oil products at a level that makes it economically attractive for oil companies to invest to increase production and reduce the country’s dependence on imports of oil products and natural gas. In this sense, although Argentina returned to free market prices in late 2017-early 2018, in mid-2018 the Argentine Government temporarily restored price agreements for crude and fuel with the industry to protect local consumers against rising fuel prices amid higher international oil prices and a steep depreciation in the peso. YPF’s creditworthiness cannot be completely de-linked from the credit quality of the Argentine government, and thus the company’s ratings also incorporate the risks that it shares with the sovereign.
YPF’s ratings could be upgraded (1) if the company manages to grow total production while maintaining strong margins and relatively low leverage; (2) if there is an upgrade of the government of Argentina’s B2 rating and YPF maintains its strong credit metrics for its rating category; (3) if there is a more clear view of the government’s energy policies for the next several years and how they could affect YPF.
The ratings could be downgraded (1) if YPF is unable to sustain current credit metrics; (2) if the company loses access to credit markets or lacks access to foreign currency to meet its debt service obligations; (3) if the government of Argentina’s rating is downgraded.
YPF is an Argentina-based integrated energy company with operations concentrated in the exploration, development and production of crude oil, natural gas and liquefied petroleum gas, and downstream operations engaged in refining, chemicals production, retail marketing, transportation and distribution of oil and petroleum products. The company is 51% owned by the Argentine government and had last-12-month revenue as of March 2019 of $15.7 billion and total assets of $26.8 billion. The company conducts its operations and has properties and customers in Argentina; its operations outside the country include exploration activities in Chile and Bolivia, and markets lubricants and specialties in Brazil and Chile. The company is concentrated in the Neuquina, Golfo San Jorge, Cuyana, Noroeste and Austral basins.
The methodologies used in this rating were Global Integrated Oil & Gas Industry published in October 2016, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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