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In accordance with our criteria for GREs, we see a "moderately high" likelihood that the Norwegian government would provide timely and sufficient extraordinary support to Statoil in the event of financial distress. Our view of a "moderate" likelihood of extraordinary government support is based on our assessment of Statoil's:
-- "Important" role for the Norwegian government, which reflects the group's dominant position in the Norwegian oil and gas production industry and its substantial tax and dividend payments to the state; and
-- "Strong" link with the Norwegian government, mostly reflecting the state's majority ownership, even if the state is not directly involved in operational decisions.
The SACP is underpinned by Statoil's access to vast hydrocarbon reserves on the Norwegian continental shelf, the group's increasing levels of international upstream diversity, resilient upstream profitability, and conservative balance sheet management. These strengths are somewhat offset by the group's limited downstream integration and exposure to exploration and production (E&P) industry risks, including the challenges of a continual need to replace depleting oil reserves and sustained weak discretionary cash flow (DCF) after capital investment and dividends.
S&P base-case operating scenario
We anticipate continued robust results for Statoil in 2012, with EBITDA of about Norwegian krone (NOK)250 billion-280 billion compared with NOK283 billion in 2011. We base this on our 2012 $100 per barrel oil price assumption, and production increases being somewhat offset by rising production costs. Beyond 2012, we anticipate that the company will bring significant new projects into production. As new capacity comes on stream, we expect operating performance to remain satisfactory, even with our prudent long-term oil price assumption of $80 per barrel. We believe that these projects involve execution risk linked to timing and costs, but note that progress appears sound.
S&P base-case cash flow and capital-structure scenario
We forecast adjusted funds from operations (FFO) to debt of about 70% in 2012 and 65%-70% thereafter, against our guidance of 60% for the 'AA-' rating. We anticipate that DCF will be not less than NOK10 billion in 2012 and 2013, after fairly aggressive capital spending of up to NOK105 billion and dividends of NOK20 billion, but before asset disposals. The level of DCF after 2013 will largely depend on actual investments and working capital movements, but in general we do not anticipate any meaningful DCF until after 2015, unless capital spending and/or dividends are significantly below our projections.
We note that Statoil made several sizable disposals over the past two years--the latest in June 2012 being the sale of its 54% interest in Statoil Fuel & Retail ASA for NOK8.3 billion to Alimentation Couche-Tard Inc. (BBB-/Watch Neg/--). Statoil has also made some recent sizable acquisitions. We expect management to continue to make important disposals so that the company's financial profile remains in line with the ratings. Although we anticipate that Statoil will maintain significant cash on hand in the near term, we do not discount the possibility of further small to midsize acquisitions in the upstream oil sector.
The short-term rating is 'A-1+'. We view Statoil's liquidity as "strong" under our criteria, as we anticipate that liquidity sources will stay close to 2.0x over the coming years;
We consider that Statoil's liquidity sources include:
-- Cash and cash equivalents of NOK36 billion as of June 30, 2012, of which we treat NOK2 billion as tied to operations. This was boosted by the recent proceeds from the sale of Statoil's stake in Statoil Fuel & Retail ASA for NOK8.3 billion;
-- Statoil's marketable securities of NOK45 billion. According to management those are predominantly very highly rated investments and liquid government bonds;
-- FFO over the next year of NOK120 billion-130 billion; and
-- An undrawn committed $3 billion bank facility maturing in December 2016.
These sources compare with the following needs:
-- Manageable short-term debt of NOK17 billion;
-- Capital investment of up to NOK105 billion in both 2012 and 2013; and
-- Dividends of about NOK21 billion, normally paid in the second quarter each year.
The stable outlook balances our view of Statoil's near-term challenges--such as potentially negative DCF--against our forecast of high FFO in 2012. A ratio of FFO to adjusted debt of about 60% is consistent with the ratings. In our view, FFO to adjusted debt of about 65% should be achievable on the basis of our prudent oil price assumptions, including $80 per barrel from 2014. This implies some numerical headroom within the ratings in terms of debt capacity under our base-case credit scenario, although the purpose and execution of acquisitions, investments, and any outgoings would be critical for the stability of the ratings, as would our forecast for DCF.
Overall, we consider Statoil's rating headroom to be satisfactory. That said, rating headroom would shrink if oil prices were to decline below our price assumptions, if near-term production growth targets were not met, or if capital investment or shareholder distributions were repeatedly financed with new debt rather than with operating cash flow.
The ratings could, over time, be constrained by the group's low reserve-replacement rates. But we note an improving trend with regard to reserve replacement. Ratings upside is currently unlikely, in our view, because of the intrinsic industry risk that Statoil faces.
Related Criteria And Research
-- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Assumptions: Revised Oil Price Assumptions for 2011, 2012, And 2013, July 22, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key Credit Factors: Business And Financial Risks In The Oil And Gas Exploration And Production Industry, Nov. 10, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008