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Gazprom Rating Affirmed at 'Baa2'

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Gazprom Rating Affirmed at 'Baa2' CORPORATES CREDIT OPINION Gazprom, PJSC 3 June 2020 Update following rating affirmation Update Summary To determine Gazprom, PJSC's (Gazprom) long-term issuer rating, we apply our Government- Related Issuers (GRI) rating methodology because the company is controlled by the Russian state. In accordance with this rating methodology, Gazprom’s Baa2 long-term issuer rating factors in (1) the company's Baseline Credit Assessment (BCA) of baa2, which measures RATINGS its standalone credit strength, excluding any extraordinary government support; (2) the Gazprom, PJSC Baa3 local-currency rating of the Government of Russia, with a stable outlook; (3) the high Domicile Moscow, Russia default dependence between the state and the company; and (4) the high probability of the Long Term Rating Baa2 government providing support to the company in the event of financial distress. Type LT Issuer Rating - Fgn Curr Gazprom’s Baa2/P-2 ratings, which are on par with Russia’s Baa2/P-2 country ceilings for Outlook Stable foreign-currency debt, remain supported by its strong business fundamentals, including its (1) Please see the ratings section at the end of this report vast natural gas reserves, which are the largest in the world (16% of the global gas reserves); for more information. The ratings and outlook shown (2) diversification in oil business, which generated more than 30% of its consolidated reflect information as of the publication date. EBITDA in 2019, through its 95.68%-owned subsidiary Gazprom Neft PJSC (Baa2 stable); (3) status as a core strategic holding of Russia, benefiting from a high level of government support, because of the company’s economic, political and reputational importance to the Analyst Contacts Russian state; (4) position as Russia's largest producer and monopoly exporter of pipeline Artem Frolov +7.495.228.6110 gas, and owner and operator of the world's largest gas transportation and storage system; (5) VP-Sr Credit Officer [email protected] solid market position as Europe's largest gas supplier; (6) low production costs, supporting profitability and competitiveness in export markets; and (7) significant portfolio of long-term Victoria Maisuradze +7.495.228.6067 Associate Managing Director take-or-pay gas export contracts with oil-pegged or hub-indexed prices. [email protected] The ratings factor in our expectation that the company’s credit metrics, including its leverage and cash flow metrics, will imminently deteriorate in 2020 because of the weak prices and CLIENT SERVICES demand for gas in Europe, the company’s key export market, amid the coronavirus outbreak. Americas 1-212-553-1653 Gazprom will be able to restore its credit metrics in 2021-22 assuming the gas market Asia Pacific 852-3551-3077 in Europe starts to recover. The temporary deterioration in credit metrics in 2020 will be Japan 81-3-5408-4100 mitigated by Gazprom’s robust liquidity, supported by its continuing access to domestic and EMEA 44-20-7772-5454 international debt capital markets. Gazprom's Baa2 long-term issuer rating is constrained by Russia’s Baa2 country ceiling for foreign-currency debt. Despite its high volume of exports, Gazprom remains exposed to Russia's macroeconomic, regulatory and operating environment, because most of its production facilities are in Russia. MOODY'S INVESTORS SERVICE CORPORATES Exhibit 1 Gazprom's interest coverage and cash flow metrics will largely recover in 2021 after weakening in 2020 on low gas export prices and volumes RCF/net debt (LHS) EBIT/interest expense (RHS) 90% 12.0x 80% 10.0x 70% 60% 8.0x 50% 6.0x 40% 30% 4.0x 20% 2.0x 10% 0% 2014 2015 2016 2017 2018 2019 2020F 2021F All figures are calculated using Moody’s estimates and standard adjustments. Sources: Moody’s Financial Metrics™ and Moody's Investors Service forecasts Credit strengths » Huge gas and oil reserves, the development of the Yamal project and the Eastern programme of gas exports to China, supporting long-term growth » Low production costs, supporting profitability and competitiveness in export markets » The ongoing diversification of gas export routes, despite geopolitical challenges » A significant portfolio of long-term take-or-pay gas export contracts with oil-pegged or hub-indexed prices Credit challenges » The expected weakening in credit metrics because of low gas export prices and volumes » Increasing competition with independent gas producers in the domestic market » Exposure to Russia's macroeconomic, regulatory and operating environment, including the evolving tax regime Rating outlook The stable outlook reflects our expectation that the deterioration in Gazprom’s credit metrics will be temporary, and that the company will be able to restore its credit metrics over a 18-24-month period after the coronavirus outbreak and its macroeconomic and market effects have passed. Factors that could lead to an upgrade We could upgrade Gazprom's rating if we were to upgrade Russia's sovereign rating and raise the foreign-currency bond country ceiling, provided the company retains its solid credit metrics on a sustainable basis and maintains its strong operating performance, market position and liquidity. Gazprom's long-term issuer rating is unlikely to exceed Russia's sovereign rating by more than one notch because of the company's close credit linkages with the government. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 3 June 2020 Gazprom, PJSC: Update following rating affirmation MOODY'S INVESTORS SERVICE CORPORATES Factors that could lead to a downgrade We could downgrade Gazprom's rating if we were to downgrade Russia's sovereign rating or lower Russia’s foreign-currency bond country ceiling, or the company’s operating performance, market position, financial metrics or liquidity were to deteriorate materially on a sustained basis. Key indicators Exhibit 2 Gazprom, PJSC Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 2020-proj. 2021-proj. Average Daily Production (Mboe / Day) 9,439.1 9,545.2 10,538.2 11,006.7 11,070.1 10,000-11,000 10,000-11,000 Total Proved Reserves (Mmboe) 133,487 132,689 130,390 127,544 126,130 123,000-125,000 123,000-125,000 EBIT / Avg. Book Capitalization 11.1% 6.7% 6.9% 13.1% 7.6% 4.1% 6.4% EBIT / Interest Expense 7.5x 4.6x 5.5x 11.3x 7.0x 3.5x 6.1x RCF / Net Debt 69.0% 46.4% 35.0% 73.8% 37.8% 21.0% 34.3% Debt / Book Capitalization 25.6% 21.1% 24.3% 24.3% 24.0% 26.0% 23.8% All figures and ratios are calculated using Moody’s estimates and standard adjustments. Moody's forecasts (f) or projections (proj.) are Moody's opinion and do not represent the views of the issuer. Periods are financial year-end unless indicated. LTM = Last 12 months. Source: Moody’s Financial Metrics™ Profile Headquartered in Russia, Gazprom, PJSC (Gazprom) is one of the world's largest integrated oil and gas companies. It is focused on the exploration, production and refining of gas and oil, as well as the transportation and distribution of gas to domestic, former Soviet Union (FSU) and other export markets. Gazprom also owns and operates the Unified Gas Supply System in Russia, and it is the leading exporter of pipeline gas to Western Europe. As of 31 December 2019, Gazprom had proved total oil and gas reserves of 126.1 billion barrels of oil equivalent, with proved gas reserves of 17.7 trillion cubic metres in accordance with the Petroleum Resources Management System standards, equivalent to around one-sixth of the world's total reserves. In 2019, Gazprom produced 501.2 billion cubic metres (bcm) of natural gas. Hydrocarbon production by its subsidiary Gazprom Neft PJSC amounted to 63.3 million tonnes (mt) of crude oil and gas condensate, and 22.9 bcm of gas in 2019. In 2019, Gazprom generated revenue of RUB7.7 trillion and Moody’s-adjusted EBITDA of RUB2.2 trillion. The Russian state controls 50.23% of Gazprom's shares. Exhibit 3 Exhibit 4 Revenue structure by product (for 2019) Gas sales by geography (for 2019) Gas transportation Other services 3% Former Soviet 3% Union countries Electric and 8% heat energy 7% Europe and other Crude oil and gas Gas countries* condensate 50% 46% 10% Russia 46% Refined products 27% Source: Gazprom *Including gas trading volumes. Source: Gazprom 3 3 June 2020 Gazprom, PJSC: Update following rating affirmation MOODY'S INVESTORS SERVICE CORPORATES Detailed credit considerations Huge reserves will continue to be monetised, primarily through export sales Export gas sales to Europe and other non-FSU countries, including China (A1 stable), will remain the key driver of Gazprom’s profitability and cash flow generation. Net revenue from these sales represented 66% of Gazprom's net gas sales in 2019 and 33% of the company's total net sales during the same period. According to the Russian law on gas exports, Gazprom has an exclusive right to export gas through gas pipelines. In 2019, Gazprom's gas deliveries to Europe (including Turkey) and other export markets, excluding the FSU, declined to 192.6 bcm from a record-high 201.9 bcm in 2018, primarily because of competition from growing LNG imports to Europe. Gazprom estimates that the European gas consumption increased to 559 bcm in 2019 from 549 bcm in 2018, while import requirements (the gap between own consumption and production) increased because of the decline in indigenous production to 235 bcm in 2019 from 253 bcm in 2018, driven by production cuts at the Groningen field in the Netherlands and lower production in Norway and the UK.
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