OREANDA-NEWS. Fitch Ratings has affirmed Tunisian oil and gas company Entreprise Tunisienne d'Activites Petrolieres' (ETAP) National Long-term rating at 'AA-(tun)' with Stable Outlook and National Short-term rating at 'F1+(tun)'. ETAP is a wholly-state-owned company with the specific status of a business-oriented public entity, commonly known as an EPNA.

ETAP is an important asset for the Tunisian state (BB-/Stable), playing a major role in promoting the country's oil & gas reserves and ensuring continuous domestic market supply of oil & gas. Considering the tight legal, strategic and operational links between ETAP and its sole shareholder, Fitch applies its parent & subsidiary rating linkage methodology, notching ETAP one notch down from its parent.

KEY RATING DRIVERS
State Support Remains Key
As ETAP's liquidity is dependent on the state trade compensation mechanism and cash injections to support capital expenditure, any sign of a lack of state support or financial pressure on the state would justify wider notching between the state's and ETAP's ratings. At present, ETAP continues to receive annual cash injections from the state in a context of rising capex. Fitch expects around ETAP will receive TND50m from the state in 2015.

Small Scale Relative to Peers
ETAP's business profile lacks the diversification of its private sector international peers, which leaves it substantially exposed to the volatility of oil and gas prices. Moreover, ETAP operates on a much smaller scale than its national oil company peers such as State Oil Company of the Azebaijan Republic (BBB-/Stable) or JSC National Company KazMunayGas (BBB/Stable).

Declining Revenue and EBITDA
Fitch expects ETAP's revenue and operating EBITDAR to continue to decline in 2015, driven by further decline in oil and gas prices (average of USD55/bbl for oil in 2015 versus USD105/bbl in 2014) despite a favourable US dollar/Tunisian dinar exchange rate. Production output for crude oil, at 60% of revenue, declined by 20% yoy in 2014 and Fitch does not expect a reversal in oil production trend over the next two years.

However, gas and liquified petroleum gas (LPG) production is expected to continue to increase, partly driven by the Nawara project (production expected to start by end-2016). Funds from operations (FFO) should reach TND600m in 2015 according to Fitch's forecasts, and is yet to benefit from the positive reversal of working capital needs. We expect FCF to remain negative in 2015 due to high capex and dividends and to improve from 2017 as the Nawara project starts to feed into profits.

Financial Profile Remains Conservative
ETAP is expected to raise new debt in 2015 and 2016 to finance ongoing projects, including the Nawara project. Fitch estimates FFO adjusted leverage at 1.4x at FYE15 from 0.4x at FYE14. Delays in capex execution from 2014 (expected TND970m versus realised TND340m) mean that most of the capex will be realised between 2015 and 2016. Although we expect a peak in FFO adjusted leverage in 2015 and 2016, the recovery of FCF from 2016 should help ETAP deleverage over the medium term.

LIQUIDITY AND DEBT STRUCTURE
ETAP should sustain a healthy liquidity position over 2015 and 2016 thanks to its strong available cash (around TND900m at FYE14) and access to bank debt. As of end June 2015, ETAP had USD 261m of undrawn bank loans. In addition, the state is also likely to continue to support ETAP's capex via capital injections estimated at TND50m in 2015 (TND200m in 2014).

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for ETAP include:
- Oil and gas prices in line with Fitch's base case price deck of USD 50/bbl for oil and USD6/mcf in 2015 and USD60/bbl and USD6/mcf in 2016.
- Profitability will remain low compared to historical levels due to declining prices and oil production, slight improvement from 2017 onward after Nawara project start-up
- Working capital to reverse in 2015 due to declining oil & gas prices and state compensation for ETAP's trade deficit
- Capex includes maintenance capex and expansionary capex related mainly to Nawara project spread over 2014-2016
- Dividend pay-out ratio of 1x in 2015
- State cash injection to support ETAP's capex of TND50m in 2015

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action:
- Positive rating action on Tunisia.

Negative: Future developments that may, individually or collectively, lead to negative rating action:
- Weakening links to the state would result in a downgrade of ETAP's ratings. A potential indicator of weaker state support would be a significant weakening of ETAP's credit metrics.