Moody's: Weak rouble, advantageous tax system will keep Russian oil majors' credit quality strong in 2017

The weak rouble and an advantageous oil-linked domestic tax regime, among other factors, will keep Russian integrated oil and gas companies' credit quality robust in 2017, says Moody's Investors Service in a report published today. However, leverage for a number of the biggest players will uptick slightly due to rising capital expenditure, M&A activity and dividend payouts.

"A weak rouble, favourable domestic taxation system for oil exports and stable oil production supported by intensified drilling are among the factors that will support Russian integrated oil and gas companies' profitability this year. This expected scenario is despite falling downstream margins and bigger investments in the upstream segment in 2017," says Denis Perevezentsev, Vice President -- Senior Credit Officer at Moody's.

However, Gazprom, PJSC (Ba1 stable) may generate negative free cash flow after dividends this year due to elevated capital spending while PJSC Oil Company Rosneft (Ba1 stable) might find it difficult to break even in free cash flow terms on the account of its M&A activity. A potential increase in dividend payouts by certain state-controlled entities, including Gazprom and Rosneft, could pressure their cash flows and would be credit negative.

Capex will remain focused on the upstream segment with Russian oil majors likely to increase spending in rouble terms in 2017 following a 12% hike to RUB1.2 trillion last year as this segment accounts for at least 80% of their EBITDA and offers potential for earnings growth.

Growth in production at new 'greenfield' sites has helped to offset declines at depleted fields in Western Siberia, while increased production drilling at mature fields has supported growing oil and gas condensate production overall. The agreement with the Organisation of the Petroleum Exporting Countries (OPEC) is unlikely to harm the companies' operational profile as it is effectively a freeze rather than production cut.

Companies are likely to keep downstream capex at a minimum with all Russian oil majors except for Tatneft PJSC and Gazprom Neft PJSC having made sharp spending cuts. Higher excise taxes on domestic sales of petroleum products and a significant jump in export duties on dark products (fuel oil) from 2017 have led to further compression in refining margins.

Moody's expects that Russian oil producers will ramp up exports of crude oil as the reduction in export duties on it and the rouble's weak exchange rate make it a more attractive proposition than sending crude oil to domestic refineries.