8/15/2019 Press Release

Fitch Upgrades and Gazprom Neft to 'BBB' on Sovereign Upgrade

Fitch Ratings - - 15 August 2019:

Fitch Ratings has upgraded PJSC Gazprom's and subsidiary PJSC Gazprom Neft's (GPN) Long-Term Foreign Currency Issuer Default Ratings (IDR) to 'BBB' from 'BBB-' following a similar rating action on the Russian sovereign. The Outlooks on the Long-Term IDRs are Stable. Fitch has also upgraded Gazprom's and GPN's Short-Term Foreign-Currency IDRs to 'F2' from 'F3'.

Gazprom's IDR is constrained by that of (BBB/Stable), the energy company's controlling shareholder, based on Fitch's Government-Related Entities (GRE) Rating Criteria and Parent and Subsidiary Rating Linkage Criteria. We assess the standalone credit profile (SCP) of Gazprom at 'a-', taking into account its strong operational and financial profiles as well as country-specific and corporate governance risks. As Gazprom's Long-Term IDR is constrained by the sovereign's, Gazprom's Short-Term IDR is also at the same level as the sovereign's under Fitch's Short-Term Ratings Criteria.

GPN's rating is aligned with that of parent Gazprom due to strong linkages between the companies. GPN is classified as Gazprom's principal subsidiary in Gazprom's Eurobond documentation and is therefore subject to cross-default provisions. Oil upstream and downstream operations within the Gazprom group are predominantly managed by GPN. We expect Gazprom to support GPN should the need arise. The alignment of Long-Term IDRs also leads to the alignment of GPN's Short-Term IDR with that of Gazprom in accordance with Fitch's Short-Term Ratings Criteria.

Gazprom is Russia's major state-owned energy company, engaged in natural gas production, transportation and distribution, as well as oil production and refining, heat and electricity generation. We believe Gazprom will remain the largest gas supplier to Europe, its key market, and that it would be able to defend its market share given low production costs.

RATING ACTIONS ENTITY/DEBT RATING PRIOR LT IDR Gazprom PJSC BBB BBB- Upgrade ST IDR F2 F3 Upgrade LC LT IDR BBB BBB- Upgrade LT senior unsecured BBB BBB- Upgrade PJSC Gazprom Neft LT IDR BBB- BBB https://www.fitchratings.com/site/pr/10086093 1/8 8/15/2019 Press Release Upgrade ST IDR F2 F3 Upgrade LC LT IDR BBB BBB- Upgrade LT senior unsecured BBB BBB- Upgrade GPN Capital S.A. LT senior unsecured BBB BBB- Upgrade Gazprom ECP SA ST senior unsecured F2 F3 Upgrade Gaz Capital S.A. LT senior unsecured BBB BBB- Upgrade OOO Gazprom Capital LT senior unsecured BBB BBB- Upgrade

Key Rating Drivers

LNG Surplus Weighs on Prices: Global LNG surplus emerged in 2019 as Asian and other international demand for LNG fell short of additional volumes supplied by Australian, US and Russian projects that came on-stream in 2018. European gas buyers have accumulated large amounts of natural gas in storage in 2019 as spot prices declined due to a LNG glut. We currently expect global LNG demand to increase in 2019-2020, offsetting LNG liquefaction capacity additions in the same period, with spot gas prices gradually recovering in 2H19 from current lows.

Limited Decline in Export Volumes: Gazprom's exports to Europe (incl. Turkey) in 7M19 fell 4.8% yoy to 111.5 billion cubic metres (bcm), driven by competition from LNG producers and a weaker economic environment in Turkey. Imports of Gazprom's gas were supported by take-or-pay clauses that are included in the majority of Gazprom's contracts, a higher share of competitive spot-based sales in 2019 due to materially greater volumes sold through European Electronic Trading Platform, and increased flexibility of Gazprom's pricing achieved over recent years.

Spot Prices Reduce EBITDA: The oversupply of LNG resulted in European spot gas prices plummeting by a third yoy in 1H19. We currently project Gazprom's EBITDA to decline by around 20% from USD44 billion in 2018, but for it to remain higher than USD27 billion in 2017. We assume that 30% of Gazprom's 2019-2020 European export volumes will be sold at pure spot prices, while the rest will be of a price mix represented by oil- linked contracts, hybrid contracts dependent on both oil and gas prices, and gas forwards-linked contracts.

https://www.fitchratings.com/site/pr/10086093 2/8 8/15/2019 Press Release Moderate Leverage Expected: The decline in EBITDA will not be critical for Gazprom's credit profile as we project the company's funds from operations (FFO) adjusted net leverage to not exceed 1.5x within the next two years. This is moderate compared with international and Russian peers'. Its end-2018 net leverage was 1.0x due to strong FFO.

Robust Standalone Profile of GPN: We assess GPN's SCP at 'bbb' due to the company's large production size of 1.3mboe/d (million barrels of oil equivalent per day; excluding joint ventures) in 2018, stable production growth at major oil fields and strong credit metrics. Successful launch and ramp-up of its large greenfield projects (Novy Port and Prirazlomonye), which are subject to tax benefits and/or the excess profit tax (EPT) scheme, support high profit margins. In 2018 GPN's EBITDA increased 42% yoy due to supportive crude oil prices, a favourable rouble rate and a ramp-up of greenfield projects.

At end-2018 GPN's FFO adjusted net leverage decreased to a record low 1.2x. Over the longer-term, we project that softening crude oil prices, along with GPN's intention to increase the company's dividend payout ratio, will lead to an increase in leverage metrics, although FFO adjusted net leverage should still be comfortably within 2.0x.

Derivation Summary

Gazprom's rating is constrained by that of the sovereign as the company has strong ties with Russia. Gazprom's SCP of 'a-' incorporates risks related to the operating environment and corporate governance. The company's scale is large compared with international peers'. Gazprom's 2018 EBITDA (USD44 billion) was comparable with that of plc (AA-/Stable; USD53 billion), BP plc (A/Stable; USD33 billion), Total SA (AA-/Stable; USD30 billion).

Gazprom consolidates the world's largest hydrocarbon reserves among listed companies and produces 8.9 mmboe/d of gas and 1.3 mmboe/d of liquids, excluding equity affiliates, substantially more than its peers. Gazprom benefits from monopoly rights for pipeline gas exports from Russia. The company's assets are primarily located in a single country, Russia, and its export sale volumes highly depend on gas demand in Europe; these two factors negatively affect Gazprom's business profile.

Gazprom's financial profile is also strong with end-2018 FFO adjusted net leverage at 1.0x, lower than international peers'. We expect net leverage to not exceed 1.5x within our forecast period of 2019-2020. Gazprom maintains a significant liquidity cushion.

Gazprom scores '30' points under Fitch's GRE criteria as all factors under the criteria are assessed as 'strong' for the company. Other companies that have similar or higher scores include China National Corporation (CNPC, A+/Stable), Saudi Arabian Oil Company (, A+/Stable), Abu Dhabi National Oil Company (ADNOC, AA/Stable), Petroleos Mexicanos (PEMEX, BB+/Negative) and Petroleo Brasileiro S.A. (, BB-/Stable).

GPN's rating is aligned with that of Gazprom. GPN's ties with Gazprom are strong even though the former has operational autonomy and management overlap is limited. The companies are closely related in strategic and legal aspects because GPN is subject to cross-default provisions in Gazprom's Eurobond documentation. Nearly all Gazprom's oil production is consolidated under GPN's umbrella in line with the parent's oil strategy.

Key Assumptions

https://www.fitchratings.com/site/pr/10086093 3/8 8/15/2019 Press Release - Average Brent oil price of USD65/bbl in 2019, USD62.5/bbl in 2020, USD60/bbl in 2021 and USD57.5/bbl thereafter

- Average National Balancing Point (NBP) gas price of USD5.5/mcf in 2019, USD6.25/mcf in 2020 and USD6.5/mcf thereafter

- USD/RUB of 65.6 in 2019, 66.6 in 2020, 67.3 in 2021 and 67.5 thereafter

RATING SENSITIVITIES

Gazprom:

Developments That May, Individually or Collectively, Lead to Positive Rating Action

- An upgrade of Russia, provided Gazprom's standalone credit profile does not weaken and links with Russia remain strong

Developments That May, Individually or Collectively, Lead to Negative Rating Action

- Negative rating action on Russia

- Material deterioration of SCP

GPN:

Developments That May, Individually or Collectively, Lead to Positive Rating Action

- An upgrade of Gazprom, assuming links with Gazprom remain strong

Developments That May, Individually or Collectively, Lead to Negative Rating Action

- Negative rating action on Gazprom

- Material deterioration of SCP leading to a re-assessment of the links with Gazprom

Rating Sensitivities for the Russian sovereign as per the rating action commentary dated 9 August 2019:

The following factors may, individually or collectively, result in positive rating action:

-Higher growth prospects while preserving improved macroeconomic stability

-Continued strengthening of fiscal and external savings buffers, for example, through sustained high oil prices and windfall revenues

-Improvement of structural indicators, such as governance standards.

The following factors may, individually or collectively, result in negative rating action:

-Imposition of additional sanctions that undermine macroeconomic and financial stability, or impede debt service payments

-Changes in the policy framework that undermine policy credibility and macroeconomic stability gains, for example due to sustained low growth prospects https://www.fitchratings.com/site/pr/10086093 4/8 8/15/2019 Press Release -Sustained erosion of the sovereign balance sheet, for example derived from the materialisation of contingent liabilities from the large public sector

Liquidity and Debt Structure

Strong Liquidity: At 31 March 2019, Gazprom had RUB1.1 trillion in cash excluding other financial assets, which was sufficient to cover RUB0.6 trillion of short-term debt and Fitch-projected negative free cash flow (FCF) over the next 12 months of RUB0.1 trillion, including dividends.

GPN's short-term debt of RUB30 billion was comfortably covered by cash of RUB276 billion at 30 June 2019.

Summary of Financial Adjustments

Gazprom:

- Fitch adjusted Gazprom's debt by adding 6x the annual operating lease expense

- We added RUB816 billion of bank deposits to the company's end-2018 readily available cash. We also removed from Gazprom's working capital RUB510 billion of the increase in deposits, which led to a rise in its 2018 FCF by the same amount

- We included RUB118 billion of financial guarantees provided by Gazprom in its end-2018 debt

- We removed dividends paid to minority shareholders from total dividends paid and subtracted them from Gazprom's FFO.

GPN:

- Fitch adjusted GPN's end-2018 debt by adding 6x the annual operating lease expense of RUB15.7 billion

- Fitch included RUB53 billion of deferred consideration for Gazprom-related Prirazlomnoye field in GPN's debt.

Public Ratings with Credit Linkage to other ratings

Gazprom's Long-term IDR is constrained by that of Russia. GPN's Long-term IDR is aligned with that of Gazprom.

ESG Considerations

Gazprom has an ESG Relevance Score of 4 for governance structure due to our view that some of its operational and financial decisions may be influenced by political and other non-business considerations, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. For more information on ESG Relevance Scores, visit www.fitchratings.com/esg. https://www.fitchratings.com/site/pr/10086093 5/8 8/15/2019 Press Release

Additional information is available on www.fitchratings.com

FITCH RATINGS ANALYSTS

Primary Rating Analyst Yulia Buchneva Associate Director +7 495 956 6904 Fitch Ratings CIS Ltd Business Centre Light House, 6th Floor 26 Valovaya St. Moscow 115054

Secondary Rating Analyst Slava Demchenko Associate Director +7 495 956 2407

Committee Chairperson Angelina Valavina Senior Director +44 20 3530 1314

MEDIA CONTACTS

Adrian Simpson London +44 20 3530 1010 [email protected]

Applicable Criteria

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018) Government-Related Entities Rating Criteria (pub. 25 Oct 2018) Corporate Rating Criteria (pub. 19 Feb 2019) Short-Term Ratings Criteria (pub. 02 May 2019)

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