Fitch Affirms YPF S.A.'s IDRs at 'CCC'
The Rating Outlook for the company's local currency IDR is Negative.
KEY RATING DRIVERS
YPF's ratings reflect its strong linkage with the credit quality of the Republic of Argentina and the company's relatively low reserve life. YPF's 'CCC' ratings are linked to the sovereign rating of Argentina, which has an 'RD' foreign/local currency IDR. Fitch has assigned a country ceiling of 'CCC' to the Republic of Argentina, which limits the foreign currency rating of most Argentine corporates, including YPF to 'CCC'.
Country ceilings are designed to reflect the risks associated with sovereigns placing restrictions upon private sector corporates, which may prevent them from converting local currency (LC) to any foreign currency (FC) under a stress scenario, and/or may not allow the transfer of FC abroad to service FC debt obligations. Key concerns of corporates domiciled in Argentina include high inflation, government meddling, economic uncertainty, and limited access to debt markets especially after the country's recent default.
LINKAGE TO SOVEREIGN: YPF's ratings reflect the close linkage with the Republic of Argentina resulting from the company's ownership structure as well as recent government interventions. The Republic of Argentina controls the company through its 51% participation after it nationalized the company on April 2012. Following this action, the company's strategy and business decisions are governed by the Republic of Argentina.
LOW HYDROCARBON RESERVE LIFE: The ratings consider the company's relatively weak, though improving, operating metrics characterized by low reserve life. As of year-end 2014, YPF reported proved reserves of 1,212 million barrels of oil equivalent (boe) and average production of 560,100 boe per day (44% crude oil). In 2014, proved reserves grew by a healthy 12% year-over-year rate, with a 163% reserve replacement rate. Based on production trends, the company's reserve life is below-optimal at approximately six years. This factor could create significant operational challenges in the medium to long term, and justifies the company's ramped up capex program to increase upstream reserves/production.
IMPROVING PRODUCTION: The company's average production of 560,100 boe in 2014 was up nearly 14% year-over-year, driven in large part by 25% growth in natural gas production. Given the company's ambitious capital expenditure program, Fitch expects the company to continue to grow production in 2015. Production in the first quarter of 2015 showed a continuation of steady growth as it averaged 583,800 boe per day, which is 10% higher than 1Q'14 figures.
Both crude oil and natural gas production have steadily grown on a quarterly basis helped in large part by the steady growth in tight gas and shale oil production. After only two years, the Loma Campana shale oil field is the second largest producing field in Argentina with gross production increasing from 7,900 boe/day in 1Q'13 to 41,700 boe/day in 1Q'15.
STRONG BUSINESS POSITION: Fitch expects the company to continue to solidify its market leadership in Argentina. YPF benefits from a strong business position supported by its vertically integrated operations and dominant market presence in the Argentine hydrocarbons' market. Fitch anticipates that YPF will continue to exercise an active role in domestic fuel and gas supply. In the downstream segment, the company benefits from relatively high prices for refined products in Argentina, as domestic sales of refined products grew by 6% in 2014 allowing YPF to increase its market share of gasoline sales to nearly 58% (from 55% in 2013) and diesel sales to 60% (from 58%).
ADEQUATE CREDIT PROTECTION METRICS: YPF has relatively solid credit protection metrics, characterized by moderate leverage and a manageable debt amortization schedule. For the full-year 2014 period, total financial leverage, as measured by total debt-to-EBITDA, reached 1.2x, which is considered low for the assigned rating. YPF's total debt-to-total proved reserves ratio was solid at USD4.7 per boe. Following local and international debt issuances in the first half of the year, Fitch expects for the company's gross leverage ratio to rise slightly above the 1.5x level by the end of 2015.
GROSS LEVERAGE EXPECTED SLIGHTLY ABOVE 1.5x: Total debt as of the first quarter of 2015 amounted to approximately USD6.4 billion. EBITDA for 2014 was approximately USD4.9 billion, which is up 18% on a year-on-year basis, though Fitch is conservatively assuming flat EBITDA trends in 2015. During recent years, the company's leverage has been moderately increasing, mostly as a result of increases in debt to fund the company's ramped up capital expenditure program.
Fitch's conservative forecast believes gross leverage could increase to slightly above the 1.5x level in the near to medium term given YPF's ambitious 2013-2017 USD28-USD30 billion capex program (capex of USD6 billion/year). This would be in-line with the company's conservative long-term target of a net debt:EBITDA ratio of 1.5x; these leverage levels are still considered moderate for the rating category. Incorporating the 2Q15 bond issuances (approximately USD1.6 billion), the company's leverage ratio for the last 12 months (LTM) March 2015 would rise to 1.6x on a pro forma basis. Fitch does not expect further international debt issuances during 2015, though some smaller local debt issuances are possible.
RATING SENSITIVITIES
YPF's ratings could be negatively affected by a combination of the following: further economic deterioration and the Republic of Argentina's inability to convert and transfer foreign exchange for YPF; a significant deterioration of credit metrics; and/or the adoption of adverse public policies that can affect the company's business performance in any of its business segments.
A positive rating action in the short to medium term is considered unlikely given the linkage with sovereign credit quality and Argentina's current sovereign restricted default rating.
LIQUIDITY AND DEBT STRUCTURE
ADEQUATE LIQUIDITY: Total cash and equivalents amounted to approximately USD1.251 billion as of March 31, 2015, which is equivalent to 75% of short-term debt totalling USD1.678 billion. Adding an international debt issuance of USD1.5 billion and a local market debt issuance totalling ARS935 million (approximately USD103 million) during the second quarter of 2015, the company's pro forma cash position would be USD2.8 billion which covers more than 100% of the company's short-term debt.
KEY ASSUMPTIONS
--Mid-single digit production growth;
--Realized oil prices of USD70/bbl, with increased realized natural gas prices increasing to the USD4.5/MMcf level over the next five years;
--Low single-digit revenue growth in dollar terms over the next five years;
--EBITDA of USD5 billion+/year over the 2015-2019 period;
--Capex of USD6 billion/year;
--Leverage levels in the 1.5x range over the next five years.
Fitch has affirmed the following ratings:
YPF S.A.
--Foreign currency IDR at 'CCC';
--Local currency IDR at 'B-';
--International senior unsecured bond ratings at 'CCC/RR4'.
The Rating Outlook for the company's local currency IDR is Negative.
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