OREANDA-NEWS. February 04, 2015. Low oil prices should not directly affect ratings of Russian oil and gas (O&G) companies, as their fundamentals will remain solid for the rating levels because of their financial flexibility, Fitch Ratings says. Possible intensification of sanctions, lack of external finance and the direction of the sovereign rating are more important factors driving Russian O&G ratings for now.

Stress testing Russian O&G companies assuming no recovery in oil prices (average 2015-17 oil prices at USD55/bbl and USD/RUB exchange rate at 60) shows their credit burden, as measured by net leverage, should remain acceptable for the current rating levels. We expect limited downgrades triggered directly by low oil prices. Some companies are likely to see their interest coverage ratios fall below our negative rating action guidance due to higher cost of funds, but this factor alone should not result in a downgrade, as long as an issuer's leverage and other metrics are commensurate with the rating level.

The main reason for Russian O&G companies preserving solid credit metrics as oil prices fall is their relatively low earnings volatility than most of their international peers. This is primarily due to the progressive tax regime in the upstream sector, relative flexibility of the rouble exchange rate, and - in case of gas producers - regulation of domestic natural gas prices. All these factors smoothed the Russian majors' EBITDA drop in 2009, when oil prices collapsed, and we expect the same factors to help them in 2015-2017, should oil prices remain depressed.

Also, we expect that O&G companies' capex will go down at least in dollar terms as a result of the rouble devaluation, as up to 75% of it is rouble-pegged. In addition, we expect Russian companies to reduce their capex budgets in response to weaker prices and fewer financing options through stricter capital discipline, negotiations with contractors and possibly putting some new projects on hold.

The possible revision of the tax regime - aimed at increasing the government's stake in O&G revenues - presents a risk to earnings and ratings. But we view this as unlikely at this stage. Another risk is that the state may indirectly pressure oil companies to keep domestic O&G product prices, which face upward pressure from the falling rouble, below the export netback price to avoid public discontent and curb inflation.

Our base case price deck reflects our expectation that the oil price will adjust to the marginal cost of supply during the course of the next 1-2 years. Nevertheless, taking into account the overall uncertainty in the market we now put more emphasis on stress testing to see how O&G companies will fare under USD55/bbl in the medium term.

Fitch's Special Report "Stress Testing Russian Oil and Gas," published today, looks into Russian O&G companies' credit metrics if oil prices do not recover in 2015-17. The report is available from www.fitchratings.com.