OREANDA-NEWS. December 08, 2015. Fitch Ratings has assigned OMV AG's (A-/Stable) subordinated fixed-to-reset rate euro-denominated notes a final rating of 'BBB'. The securities qualify for 50% equity credit.

The rating reflects the highly subordinated nature of the notes, which are considered to have lower recovery prospects in a liquidation or bankruptcy scenario than senior debt. The equity credit reflects the structural equity-like characteristics of the instruments including subordination, maturity in excess of five years and deferrable interest coupon payments. Equity credit is limited to 50% given the securities' cumulative interest coupon, a feature considered more debt-like in nature.

The notes' rating and assignment of equity credit are based on Fitch's hybrid methodology, dated 25 November 2014 ("Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis" available on www.fitchratings.com).

KEY RATING DRIVERS FOR THE NOTES
Ratings Reflect Deep Subordination
The notes have been notched down by two notches from OMV's Long-term Issuer Default Rating (IDR) given their deep subordination and consequently, the lower recovery prospects in a liquidation or bankruptcy scenario relative to the senior obligations of the issuer. The bonds rank pari passu with OMV's fixed-to-floating EUR750m notes issued in 2011, also rated 'BBB' with 50% equity credit.

Equity Treatment
The securities qualify for 50% equity credit as they meet Fitch's criteria with regard to deep subordination, remaining effective maturity of at least five years, full discretion to defer coupons for at least five years and limited events of default. These are key equity-like characteristics, affording OMV greater financial flexibility.

Effective Maturity Date
While the notes are perpetual, Fitch deems the effective, remaining maturity as 2026 for the short tranche (Perp-NC6) due to the notes' 100bps coupon step-up from year 10 and the lack of replacement language. According to Fitch's criteria, the equity credit of 50% will change to 0% five years before the effective remaining maturity date.

The long tranche (Perp-NC10) includes replacement language, and we therefore do not apply a time limit for equity credit. The issuer has the option to redeem the notes on the first and second call dates in 2021 and 2026, respectively (for 6-year non-call bond) or 2025 (for 10-year non-call bond) and on any coupon payment date thereafter.

Cumulative Coupon Limits Equity Treatment
The interest coupon deferrals are cumulative, which results in 50% equity treatment and 50% debt treatment of the hybrid notes by Fitch. The company will be obliged to make a mandatory settlement of deferred interest payments under certain circumstances, including the declaration of a cash dividend. This is a feature similar to debt-like securities and reduces the company's financial flexibility.

KEY RATING DRIVERS FOR OMV
OMV is an Austria-based medium-size integrated oil and gas company that mainly operates mature oilfields in Romania and Austria, and has stakes in a number of upstream assets in the North Sea, North Africa and the Middle East. Its 2014 upstream output OMV was 309 thousand barrels of oil equivalent per day (kboepd) and at end-2014 it had 1.1 billion barrels of oil equivalent (boe) in proven reserves. In this oil price environment we do not expect OMV to increase its hydrocarbon production as it had previously planned.

We forecast that in 2015-2018 OMV's credit metrics will remain commensurate with the 'A' rating category, ie, funds from operations (FFO) adjusted net leverage of under 2x (end-2014 - 2.1x) and FFO fixed charge cover of around 9x (end-2014 - 10.1x).

Flat Upstream, Targets Revised
In 9M15, OMV posted a 2% decrease in total hydrocarbon output yoy to 300kboepd, mainly due to lower production in Q315. Lack of contribution from OMV's assets in Yemen and Libya was partly offset with output in Norway and New Zealand.

OMV's upstream operating costs per barrel of oil equivalent fell 18% yoy in 9M15 to USD13.6/bbl, reflecting a stronger US dollar and the cost-cutting measures that OMV is currently implementing to combat the oil price decline. We view this achievement as positive given that OMV operates in relatively high-cost areas such as the North Sea and central and eastern Europe.

We conservatively forecast OMV will achieve oil and gas production of no more than 315kboedpd in 2018 on lower contribution from the North Sea than expected by management and lower production in Libya and Yemen due to political uncertainty.

Downstream Saves Performance
In 9M15 OMV reported a 29% fall yoy in clean CCS EBIT to EUR1.2bn, mainly due to sharply lower revenues (down 38% yoy) on lower oil prices. Downstream accounted for 77% of clean CCS EBIT, compared with 22% in 9M14. This was mainly the result of favourable refining margins that averaged USD7.7 per barrel (bbl) in 9M15, compared with USD2.7/bbl in 9M14.

In our forecasts, we expect OMV's downstream (refining and marketing) margins to return to USD5/bbl - USD6/bbl in 2016-2018 from current highs, as Europe has persistent refining overcapacity. These margins incorporate OMV's improved refining asset mix due to retention of better performing or recently upgraded assets eg, modernised Petrobrazi in Romania, in the company's portfolio.

Weakening Cash Flows
OMV expects to spend between EUR7.5bn to EUR9.0bn on capex in total over 2015-2017, of which roughly 80% is to be allocated to upstream. We assume spending will be in the lower part of this range as we expect oil prices at USD55/bbl in 2016 recovering to USD65/bbl in 2017. We view this upstream capex reduction as a temporary cash-saving measure. However, if this trend persists, it may change our view on the company's future upstream profile, as OMV's current upstream production is commensurate with the 'BBB' rating category.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Fitch's latest Brent price deck of USD55/bbl in 2015, USD55/bbl in 2016, USD65/bbl in 2017 and USD70/bbl in 2018
- Upstream production of between 300kboepd and 315kboepd in 2015-2018
- Capex of EUR2.7bn in 2015 and EUR2.5bn-EUR3bn in 2016-2018
- Dividend payout ratio of 30% in 2015-2018
- Hybrid bond qualifying for 50% equity credit

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Funds from operations (FFO) adjusted net leverage above 2x and FFO fixed charge cover below 10x on a sustained basis.
- Failure to meet oil and gas production targets, higher-than-expected expenditure or delays in delivering upstream projects in the North Sea or significant adverse changes in taxation, licensing and regulatory regimes in OMV's main markets.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action is unlikely given OMV's limited business profile and smaller size relative to its larger and more diversified 'A' category rated European peers.

LIQUIDITY
At 30 September 2015, OMV had EUR612m in cash and cash equivalents versus EUR1.1bn in short-term debt. Historically, OMV has enjoyed good access to capital markets. We expect that the company will be able to tap capital markets to refinance upcoming maturities. Furthermore, at end-September 2015, OMV had undrawn committed credit lines of EUR3.6bn.