OREANDA-NEWS. Fitch Ratings has affirmed MIE Holdings Corporation's (MIE) Long-Term Issuer Default Rating at 'B'. The Outlook is Stable. At the same time, MIE's senior unsecured rating and the ratings of its USD200m notes due in 2018 and USD500m notes due in 2019 have been affirmed at 'B', with a Recovery Rating at 'RR4'.

KEY RATING DRIVERS

Limited Rating Headroom: Fitch expects MIE's cash flow in 2015 to shrink significantly because of a decline in production and low oil prices. As a result, MIE's leverage and coverage metrics will weaken sharply. Fitch expects the company's FFO net leverage to increase to above 5x in 2015 (2014: 2.7x). The rating will be pressured if there is further delay in the completion of a central processing facility for debottlenecking in Kazakhstan (currently planned for 1H16), failure to increase production at Sino Gas & Energy Ltd (SGE), or tightening of the company's liquidity. However, the affirmation of MIE's ratings with a Stable Outlook is based on Fitch's expectation of an improvement in its credit profile with higher oil prices in the medium term in line with Fitch's oil price deck, and on the expectation that the company will be able to ramp up production from 2016.

Capex Deferred: To preserve cash, MIE has scaled back or deferred some of its investments in 2014, and Fitch expects capex, including those of SGE, to decline by about 50%-60% in 2015. Although investment deferrals preserve cash, they delay production increases and reserve replacements. This is of particular concern for MIE's oil projects in China, which have net proved oil and gas reserve life of only four years, although there is good growth potential for overall production and reserves in its Chinese gas projects and Kazakhstan oil fields.

Small Scale, Geographic Concentration: MIE's ratings reflect the upstream nature of its business, and its small operating scale. At end-2014, MIE had net proved oil and gas reserves of 116.8 million barrels of oil equivalent (mmboe), with net production of 16,373 barrels per day. While the increase in production in Kazakhstan has improved MIE's income diversity, over 60% of the company's net production and over 90% of EBITDA in 2014 was still generated by oilfields in north-eastern China, under production sharing contracts (PSCs) with PetroChina Company Limited (A+/Stable).

Vulnerable to Oil Price Cycles: As a small-scale upstream exploration and production company with primarily liquid-based production, MIE is highly exposed to the fluctuations in crude oil prices. MIE's realized oil sale price declined 11% in 2014 to USD85.99/barrel, which is likely to stay at historically low levels in 2015. Its exposure to gas is however expected to increase with the ramp-up of production at SGE.

Manageable Liquidity: MIE's near-term refinancing risk is manageable. The next major unsecured debt maturity is USD35m (about CNY220m) due in November 2015. At end-2014 MIE had cash balances of CNY689m and USD82m available under a credit facility from China Construction Bank. According to the company, the credit facility is available for drawdown until December 2015 and no drawdown condition applies. However, MIE's has significant refinancing risks in 2018 and 2019 when USD700m of notes fall due.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:
- Oil prices in line with Fitch's base case price deck as outlined in the "Fitch Oil and Gas Assumptions Summary", dated 11 February 2015
- Total production volume at consolidated entities to decline by 30%-40% in 2015 and gradually increase afterwards on the assumption that the Kazakhstan central processing facility for debottlenecking is completed by mid-2016
- Working capital conversion cycle to remain stable
- Capex of CNY600m-700m in 2015

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Further deferral of the completion of debottlenecking infrastructure in Kazakhstan leading to delays in production growth
- Slower-than-expected production ramp-up at SGE, impacting cash flow upstream to MIE through shareholders' loan repayment
- Deterioration of liquidity position, which could be a result of weaker-than-expected cash flow generation or unexpected investments
- FFO net adjusted net leverage of more than 3x (2014: 2.7x) on a sustained basis
- FFO gross interest coverage of less than 4.5x (2014: 4.4x) on a sustained basis

Given MIE's scale and the current challenging operating environment, Fitch does not expect positive developments to the rating or outlook in the medium term.