Moody's Ratings assigns Baa3 rating to ENAP's proposed notes; stable outlook

COMUNICADO DE PRENSA de Moody's
22 de julio de 2024

Moody's Ratings (Moody's) has assigned a Baa3 rating to Empresa Nacional del Petroleo's (ENAP) proposed senior unsecured notes for up to $700 million. All other ratings remain unchanged. The outlook is stable.

Net proceeds from the proposed issuance will be used primarily for the cash tender offer announced previously by ENAP to purchase any and all of its $700 million 3.750% senior unsecured notes due 2026, and an offer to purchase a portion of the $560 million 3.450% senior unsecured notes due 2031. As a result, the purpose of the transaction is to extend the company's debt maturity profile and will not result in additional cash proceeds, increase in the company's indebtedness or leverage.

The rating of the proposed notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by us to date and assume that these agreements are legally valid, binding and enforceable.

RATINGS RATIONALE

ENAP's Baa3 senior unsecured ratings mainly reflect its long track record and strong competitive position in the refined products market in Chile, where ENAP is the sole refiner and accounts for over half of local refined products sales, with over 90% of local gasoline sales and around 42% of diesel sales, among others. ENAP's credit profile is also aided by its business diversification, with oil and gas exploration and production (E&P) in Chile, Argentina, Egypt, and Ecuador (29% of reported EBITDA as of fiscal year ended in December 2023) and refining and marketing operations in Chile (71%). ENAP's ratings are mainly constrained by the inherent volatility in commodity price and by the threat of increased competition from refined product imports from US refiners and global refining capacity additions; also, the upstream, downstream, and gas and power sectors are highly capital intensive.

Since ENAP is 100% owned by the Government of Chile (A2 stable), the company's Baa3 rating reflects Moody's joint default rating according to its Government-Related Issuers methodology. ENAP's Baa3 rating benefits from four notches of uplift from its b1 Baseline Credit Assessment (BCA), which is a measure of a company's intrinsic credit risk regardless of support considerations. We assume high correlation between the government and the company on credit factors that could cause stress on both simultaneously and high probability of support from the Government of Chile in case of a distress situation. The government's ability to provide support to ENAP is measured by its A2 credit rating. ENAP's position in the fuel distribution market in Chile, with over half of local market share, is strategic to secure the country's sustainable energy supply. Also, track record of Government support include $250 million equity injection in 2008 and $400 million in 2018; and the fact that the Government waived its right to receive dividends for more than a decade and approves the company's budget and appoints board members. In 2023, however, ENAP paid a $400 million dividend to the Chilean Government, an advance on 2023-2024 profits, but the Finance Ministry committed to return the funds to ENAP through a capital contribution in 2024-2025 to be used in the company's business plan, future projects, and company sustainability.

Over the past few years, ENAP has pursued a more prudent financial policy, as evidenced by overall lower indebtedness which, aided by improved operating margins, has led to a significant improvement in credit metrics. Additionally, the company continues to hedge against the impact of sudden changes in crude oil prices on refining margins. During 2023, the company performed liability management operations and reduced gross debt to $3.9 billion from $4.5 billion in December 2022. As of March 2024, gross debt to last twelve months (LTM) EBITDA (Moody's adjusted) stood at  3.3x, consistent with the levels observed in 2022-2023. The EBIT to interest expense ratio was 3.5x, which is slightly lower than the approximately 4.5x ratio seen in 2022-2023, primarily due to an overall rise in the cost of debt in debt markets.

ENAP's liquidity is adequate and supported by internally generated cash flow and a broad access to capital provided by local and international bond markets and financial institutions. As of March 2024, the company's cash position of $586 million, committed bank credit facilities of around $200 million, and around $1 billion in Cash from Operations in the next twelve months compare favorably with $70 million in short-term debt (including leases) and around $850 million in capital expenditures. ENAP has generated positive free cash flow since 2019.  The proposed bond issuance proceeds to be used to redeem ENAP's 2026 and 2031 notes will further strengthen its debt amortization profile.

ENAP's main use of cash is capital spending. ENAP's 2023-2027 investment plan worth over $3.5 billion emphasizes on its Exploration and Production (E&P) business segment. The plan involves capital expenditure of around $1.4 billion for drilling campaigns in diverse locations such as Magallanes, Ecuador, Egypt, along with a recuperation project in Argentina. The comprehensive strategy also includes substantial refinery maintenance, projects aimed at reducing emissions, and investments dedicated to enhancing security. Additionally, the plan is designed to optimize energy usage and streamline bottleneck processes, thereby improving overall operational efficiency.

RATING OUTLOOK

ENAP's stable outlook assumes that the company will continue to focus on maintaining adequate operating cash flow and leverage over the medium-term and that the Government of Chile's support of the company will remain high.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Over time a significantly improved and sustained financial leverage profile more supportive of the cyclicality and volatility of the refining sector could lead to an upgrade of ENAP's BCA; quantitively, debt/EBITDA sustained at or below 3.5x (3.3x LTM March-2024) and EBIT to interest expense coverage above 3.0x (4.4x LTM March 2024); while at the same time maintaining an adequate liquidity profile. An upward rating movement would also be subject to the relative position of Chile's sovereign rating given the importance of the sovereign's credit strength in its ability to provide extraordinary support to the company.

ENAP's BCA may be lowered if the company's credit metrics and /or liquidity profile deteriorate; quantitively, if debt to EBITDA rises and is sustained above 5.5x and EBIT to interest expense lowers below 2.0x.  Any indication of a decline in the level of support from the Government of Chile would also put downward pressure on the company's ratings.

The methodologies used in this rating were Integrated Oil and Gas published in September 2022 and available at https://ratings.moodys.com/rmc-documents/393389, and Government-Related Issuers methodology published in January 2024 and available at https://ratings.moodys.com/rmc-documents/406502. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com  for a copy of these methodologies.

Founded in 1950, Empresa Nacional del Petroleo (ENAP) is Chile's national oil company and the second-largest state-owned company in the country. The company is 100% owned by the Chilean government. In the 12 months that ended 31 March 2024, the company generated revenue of $10.2 billion, with total assets of $7.6 billion.

REGULATORY DISCLOSURES

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