OREANDA-NEWS. Russian oil and gas (O&G) producers should be able to maintain stable rouble-denominated capital investments in the next several years as the progressive tax regime and rouble flexibility provide a buffer against low oil prices, Fitch Ratings says. A sovereign downgrade and tax increases remain the main potential threats to their operational profiles and ratings, since they are insulated from the direct effect of movements in oil prices.

Unlike international players, Russian producers have avoided large investment cuts as their capex is mainly pegged to the rouble, while operating cash flows have remained stable in rouble terms due to the depreciation. In 2015, the cumulative capex of Fitch-rated Russian oil players increased by 13% yoy in rouble terms; we expect it to stay unchanged in 2016 and to fall by mid-single digit numbers in 2017-18. This is supported by the operational statistics: in 2015, the volumes of development onshore drilling in Russia measured as metres drilled increased by almost 12% yoy, and rose further by 9% yoy in 1Q16.

Stable capex supports the companies' business profiles. However, weaker liquidity or more tax hikes may still force them to cut investments.

We expect credit metrics of the Russian O&G producers to broadly remain within our guidance for their ratings. PJSC Gazprom Neft (BBB-/Negative) is the only exception due to its ambitious capex programme and a high share of dollar-denominated debt. However, this should not trigger a downgrade due to Gazprom Neft's strong links with its parent PAO Gazprom (BBB-/Negative), and because of the expected deleveraging by 2018.

An unfavourable tax revision remains a major threat for the sector. This is evidenced by the tax hike announced in October 2015 and further discussions earlier in 2016. The 2015 increase was less radical than initially proposed and will cost oil producers and Gazprom 5%-7% of their EBITDA. However, this move created uncertainty regarding future taxes in the sector after 2016, especially if oil prices again retreat below USD45/bbl. We assume the industry taxes to remain elevated in 2017-18, with the mineral extraction tax rising in 2017 as originally expected, and the export duty falling to 36%, instead of 30%. This effectively means the tax hike announced in October 2015 will remain in place in 2017-18.

Russia's (BBB-/Negative) downgrade cannot be ruled out as indicated by the negative Outlook, and is another potential risk to the ratings of the Russian O&G names. Russian O&G ratings are capped by the sovereign's. We downgraded a number of higher-rated O&G players in January 2015 following our downgrade of Russia to 'BBB-'/Negative from 'BBB'/Negative on the back of the geopolitical tension over Ukraine and falling oil prices. The sovereign cap is applied due to the influence the state exerts on the sector (e. g. through taxation).