ACRA: NaftaGaz Credit Rating Outlook Improved to "Positive"

Analytical Credit Rating Agency (ACRA) confirmed the credit rating of NG-Bureniye LLC at bbb(ru), having changed the outlook to "positive." This is due to average scores of the market position, geographic diversification, business profile and level of corporate governance, high profitability, low debt burden and strong liquidity and cash flow scores. The rating is constrained by a below-average score of the company's business size and an average score of debt service, as well as a low score of the industry risk profile of the oilfield service segment in which NaftaGaz operates.

Change of the credit rating outlook from "Stable" to "Positive" is related to the Agency's expectations regarding the further reduction of the debt burden and, consequently, improvement of the company's debt service assessment.

NaftaGaz-Bureniye is a private company providing a full range of oilfield services for drilling oil and gas wells and is one of the five largest independent Russian drilling companies. The company has 1.6 thousand employees and a fleet of 28 drilling rigs.

The average score of the operational risk profile is driven by average scores of market position, business profile and corporate governance. NaftaGaz is a successful player in a moderately concentrated drilling services market with a share of about 3% based on the total penetration volume in Russia expressed in meters.

The current order portfolio has more than doubled over the year, the contract base is more than seven times higher than the company's revenue for 2023, which ensures a high level of utilization of the drilling rig fleet and allows for its further development and upgrading. The depreciation of drilling equipment corresponds to the industry average, while the rig fleet is relatively new (purchased during the past five years). The low score for product and contract diversification takes into account the company's focus on drilling services for production of predominantly liquid hydrocarbons.

The average score of geographic diversification is due to the company's presence in key Russian regions in terms of oil production. Corporate governance is also assessed at an average level. NG-Bureniye proceeds with implementing the development strategy until 2025 aimed at expanding the production capacity, increasing the customer base and developing new areas of activity. The Company applies certain elements of the risk management system. NG-Bureniye LLC is the main production asset in the structure of NaftaGaz Group. The Group also includes NaftaGaz-Service and Tsyfrovoye Bureniye (the developer of automatic drilling complex).

High profitability, low debt burden and average debt service rating. At year-end 2023, the growth rate of the company's drilling service costs significantly outpaced the growth rate of unit costs (12% vs. 7%, respectively), which was reflected in an increase in FFO margin before net interest payments and taxes and an improvement in the relative debt service score.
ACRA estimates that the weighted average profitability on FFO before net interest payments and taxes for the period from 2021 to 2026 will be 22.8%; the weighted average ratio of total debt to FFO before net interest payments for the same period will be equal to 1.4x. The Agency expects gradual reduction of the company's debt since 2025, which will be reflected in further improvement of debt burden and debt service estimates. Weighted average ratio of FFO before net interest payments to interest payments, according to the Agency's assessment, will be 4.5x for the period from 2021 to 2026.
ACRA forecasts a significant improvement in the debt service ratio as the debt burden decreases and the key rate falls starting from 2025.

Strong cash flow and liquidity scores. FCF profitability in 2023 increased to 3% vs. -7% in 2022. ACRA expects further growth of FCF profitability in the absence of significant dividend payments in the forecast period, while free cash flow will be largely used to repay leasing liabilities. High cash flow estimates and a comfortable debt repayment schedule result in a strong score of the Company's liquidity.

"Positive" outlook implies the rating increase over the horizon of 12-18 months with a high probability.

The credit rating of NG-Bureniye LLC was assigned according to the national scale for the Russian Federation based on the Methodology of Assigning Credit Ratings to Non-Financial Companies according to the national scale for the Russian Federation, as well as the basic concepts used by the Analytical Credit Rating Agency in rating activities.
The credit rating of NG-Bureniye LLC was first published by ACRA in June 2021.