OREANDA-NEWS. January 19, 2016. Fitch Ratings has today downgraded MIE Holdings Corporation's (MIE) Long-Term Issuer Default Rating to 'B-' from 'B'. At the same time, MIE's senior unsecured rating and the ratings on MIE's USD200m notes due 2018 and USD500m notes due 2019 have been downgraded to 'B-' from 'B' with a Recovery Rating of 'RR4'. All ratings remain on Rating Watch Negative (RWN).

The negative rating action reflects the challenges facing MIE from weaker than previously expected oil prices and the company's weakened financial flexibility, even though the company has terminated its earlier announced acquisition of Canada-based Long Run Exploration Ltd.

KEY RATING DRIVERS

Tightened Financial Flexibility: MIE's operating cash generation will weaken further in 2016 due to low oil prices and drop in its oil and gas production. In addition, there is currently a lack of clarity about the renewal of its only remaining bank credit facility (with a limit of CNY540m; CNY 494m undrawn at 30 June 2015). The company has said that it continues to draw down on this facility, while its renewal is being renegotiated. MIE has repaid its other major bank loan, which matured in November 2015.

High Debt Servicing Obligations: MIE has an annual debt servicing obligation of over CNY300m arising from the interest on its US dollar bonds (against a CNY275m adjusted EBITDA, excluding several non-cash impairment items, reported by the company in 1H15). As at end-1H15, MIE had cash balances of CNY739m against total borrowing of CNY4.8bn. The company also faces significant debt maturities in the medium term when its US dollar bonds mature in 2018 and 2019. While Fitch still expects oil prices to recover over the medium term, the industry faces substantial near-term challenges with oil prices continuing to remain under significant short-term pressure. Maintenance of a sufficient liquidity buffer, especially for small upstream players like MIE, is crucial in this environment.

Capex Deferred, Production Pressured: MIE scaled back or deferred some of its investments in 2014 to conserve cash, and Fitch expects capex, including those of Sino Gas & Energy Ltd, a 51% subsidiary, to decline by about 50%-60% in 2015. For 9M15, MIE's average daily net production declined to 11,531 barrels of oil equivalent (boe) per day from 16,884 boe per day in 9M14. Fitch expects MIE's production to remain lower than its 2014 levels in the near term unless there is an increase in capex. Management is likely to provide production and capex guidance to the market around March 2016.

Small Scale, Geographic Concentration: The company's challenges include mature and declining production from its legacy assets in China, which require substantial investments to maintain production, and investments in its other properties to maintain scale and production levels in the medium term. 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).

Ratings of US Dollar Notes: MIE's management believes the company can benefit from unencumbered assets, such as Da'an, that can be used to securecredit facilities. The Recovery Rating of 'RR4' on MIE's senior unsecured notes is based on weakened, but still-average recovery prospects for its senior unsecured creditors. A substantial increase in secured debt can however, lead to weakening of recovery prospects or senior unsecured creditors, thus placing pressure on the 'RR4' recovery ratings.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Oil prices in line with Fitch's base case price deck as outlined in the Fitch's "Oil and Gas Assumptions November 2015", dated 9 November 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 for MIE's existing operations

RATING SENSITIVITIES
We expect to resolve the RWN based on the company's ability to secure and maintain adequate liquidity.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- the failure to secure committed and adequate bank credit facilities in the next four to six weeks to support its liquidity can lead to a negative rating action. At the same time, negative rating action could result if the company is unable to comfortably cover its debt servicing and operating expenditure requirements and unable to maintain capital expenditure within operating cash generation, straining liquidity.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- the IDR may be affirmed at 'B-' if the company demonstrates its ability to maintain a comfortable liquidity profile. However, given the weak operating environment and challenges facing small independent E&P companies such as MIE, and the company's substantial debt maturities in 2018 and 2019, an upgrade of its IDR is not expected.