OREANDA-NEWS. Fitch Ratings has affirmed OAO Novatek's Long-term foreign currency Issuer Default Ratings (IDR) at 'BBB-' with a Stable Outlook. A full list of rating actions is at the end of this release.

Novatek's 'BBB-' rating reflects its strong business profile as Russia's second-largest natural gas producer and exporter of stable gas condensate and other liquids, its relatively low price risks untypical for the industry, and manageable debt load. The ratings also reflect Novatek's medium operational scale, country risks due to its concentration in Russia and uncertainties about how its Yamal LNG megaproject will be financed.

Sanctions imposed on Novatek by the US in July 2014 have not yet triggered any negative rating actions, in view of Novatek's sound liquidity. They have not affected the company's day-to-day operations. However, already enacted and possible future sanctions may be negative in the long term and could delay the Yamal LNG project.

As Russia's second-largest gas producer (after Gazprom), Novatek plays an important role in domestic gas supplies. In 2013 the company produced 52.2 billion cubic metres (bcm) of natural gas, up 3.4% yoy (excluding joint ventures), which corresponds to 8% of the country's total production; and sold 64bcm, accounting for 18% of total domestic gas consumption. Since 2005 Novatek's production increased by a compound annual growth rate of 10%. Fitch expect growth rates to decelerate in view of the stagnant domestic gas consumption, intensified competition between Gazprom and independent gas producers, mainly Novatek and Rosneft, and limitations on the supply side.

In 2013 Novatek's hydrocarbon production amounted to 940 thousand barrels of oil equivalent per day (mboepd, excluding joint ventures), of which 10% was liquids.

In July 2014 Novatek was included on the Sanctions Sectorial List by the US Office of Foreign Asset Control, which prohibits US companies and banks from providing new finance of longer than 90 days to the company. This has effectively barred Novatek from the US capital markets for the time being, and made access to other western markets complicated, in our view. It has no credit implications at this stage given Novatek's sound liquidity. Even under our conservative assumptions Fitch believe the company can afford not to attract new debt until at least the end of 2015. However, if the western capital markets remain closed for Novatek, Fitch would expect the company to make progress in attracting finance from alternative sources by end-1Q15 to cover its debt repayments.

Separately, Novatek will need to secure financing for its USD27bn Yamal LNG project, and the number of available options has now considerably reduced. Fitch believe Novatek and its partners could rely on Russian state support, which would possibly be available, given the project's importance for Russia's LNG strategy, and on Chinese banks. Inability to secure financing by the end of 2014 may result in the project being delayed.

The US and EU sanctions on oil and gas equipment and technology transfer into Russia enacted in July 2014 should not affect either Novatek or Yamal LNG, as they apply specifically to the Arctic, deep offshore and non-conventional oil and gas production. However, there is a risk of further sanctions as the crisis over Ukraine is far from being resolved.

RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action include:
- Negative rating action on Russia (BBB/Negative), as Novatek's rating and Outlook are capped by the sovereign's. However, Russia's possible downgrade to 'BBB-' with a Stable Outlook would have no direct implications as Russia and Novatek would be rated at the same level. Negative rating action on Russia may stem from an intensification of sanctions, a further deterioration in growth prospects, or large-scale stimulus measures that would endanger macroeconomic stability or the sustainability of public finances;
- New sanctions targeted at Novatek or more general sanctions;
- Worsened financial metrics, possibly from additional acquisitions, or equity injections or guarantees granted in relation to Yamal LNG, making the issuer's FFO net adjusted leverage rise above 2.5x (Fitch's expectations for 2014: 1.4x) and FFO interest cover falling below 10x (Fitch's expectations for 2014: 11x) on a sustained basis
- No progress with regard to attracting an alternative source of finance (Russian banks, state support, Chinese banks etc) by end-1Q15 should international financial markets remain closed.

Positive: Future developments that could lead to positive rating actions include:
- Progress with Yamal LNG, including more clarity on how the project will be financed and the amount of completion or performance guarantees granted, if any.