Fitch Assigns First-Time 'B' IDR to Compania General de Combustibles S.A.

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'B' to Compania General de Combustibles S.A. (CGC). The Rating Outlook is Stable.

Fitch also expects to rate CGC's proposed international senior unsecured bond issuance of up to USD300 million due 2021 'B(EXP)/RR4'. Proceeds from the transaction would be used mainly to refinance existing debt, with the rest used to finance capital expenditures for development and exploration activities particularly in the Austral Basin.

KEY RATING DRIVERS

CGC's ratings reflect the company's smaller production profile, and relatively low reserve life of approximately 6.4 years. These considerations are offset by the company's predominantly natural gas (NG) focused production profile in Argentina, which shows a more stable and positive scenario for domestic NG prices in a depressed environment for global oil prices; and the company's moderate leverage tempered by a weak liquidity position.

CGC's ratings are not constrained by the 'B' country ceiling of the Republic of Argentina. The company is exposed to higher regulatory risks associated with operating in the oil and gas sector in Argentina, and the long-term need to pursue a robust capital expenditure plan to develop the company's hydrocarbon reserves and further increase production. The company faces a volatile domestic business environment and inflationary pressures on its cost structures.

Fitch also incorporated the indirect benefit of having a large group such as Corporacion Americas, its Argentine infrastructure holding company, as the controlling shareholder, with a 70% stake.

SMALL PRODUCTION PROFILE: CGC's ratings reflect the company's relatively small production size compared with international peers. In Argentina, CGC is the 8th largest oil and gas producer in the country in terms of wellhead production. Although the company has exploration and production interest in 34 concessions in Argentina, 96% of the company's proved (1P) reserves, and approximately 95% of the production are in the Austral Basin. This limited diversification exposes the company to operational macroeconomic risks associated with small-scale oil and gas production.

INCREASING PRODUCTION: As of year-end 2015, production reached 19,547 barrels of oil equivalent per day (boed). On April 1, 2015, CGC acquired certain assets from Petrobras Argentina (PESA) located in the Austral basin, which significantly increased the company's size and production levels. After the acquisition of PESA's assets, the company's production profile improved and the average daily production for the last six months of 2016 was 23,833 boed, fully reflecting the production related to the PESA assets. Fitch expects the company to maintain production of 25,000 boed in 2016 and reach 30,000 boed by 2019-2020.

Due to a more favorable environment for NG prices, CGC expects to focus on NG production. During the LTM ended June 2016, 55% of the company's revenues were related to oil sales, Fitch expects oil to represent only 40% of the total sales by 2020, in line with the company's reserve profile.

LOW HYDROCARBON RESERVE: The ratings consider the company's relatively low reserve life of approximately 6.4 years. As of year-end 2015, CGC reported 1P reserves of 54.845 million boe, with 70% related to NG. Based on production expectations. The relatively low reserve life could create significant operational challenges in the medium- to long-term, and gives the company limited flexibility to reduce capex investments in order to increase upstream reserves/production.

CGC is in the process of renewing the concessions in the Santa Cruz I & II areas expiring in 2017 with the province of Santa Cruz. If the company extends these concessions for an additional 10 years, it could result in an increase in 1P reserves of 8.7 million boe, slightly improving the company's reserve life and in-line with the median for Fitch-rated speculative grade peers. Positively, the company's reserve life extends beyond the duration of the proposed bond. Fitch believes the acquisition of PESA's assets in first-quarter 2015 (1Q15) improved CGC's reserve profile, and may provide significant upside potential from its exploration opportunities for the upcoming years.

SLIGHTLY IMPROVING REGULATORY RISK: CGC's ratings reflect high regulatory risk given strong government influence on the energy sector in Argentina. CGC operates in a highly strategic sector where the government has a role as the price regulator, and controls subsidies for industry players. Fitch believes the recent Argentine administrative initiatives may result in an improved operating environment for energy companies in Argentina.

POSITIVE ENVIRONMENT FOR DOMESTIC PRICES: In recent years domestic hydrocarbon prices have seen increases as the government has attempted to provide incentives to E&P producers to increase production. Following the sell-off in global oil prices, this has led to a positive dynamic in the Argentine domestic market, as the government has allowed oil prices to remain at levels above global oil prices. Despite the sharp global decline in oil prices seen during the past year, the price of light oil in the domestic Argentine market has only declined by 11% in 2015 and remained above international prices.

Via Resolution No. 60/2013, the Argentine government created an incentive program for generating incremental natural gas production, whereby CGC is entitled to receive a more attractive price of between USD4-USD7.50 per million BTU (MMBTU) above its invoiced average gas price if the company manages to increase gas production. Given the country's reliance on thermal energy for electricity generation, Fitch expects this program to remain in place until 2017 and may be extended further. CGC's average realized price for gas sold (including the stimulus plan) is expected to grow to 4.25/MMBTU in 2016 from 2.91/MMBTU in 2015, and to reach close to 5.00/MMBTU by 2017.

ADEQUATE CREDIT PROTECTION METRICS: CGC has adequate credit protection metrics, characterized by moderate leverage. For the LTM ended June 2016, gross leverage, as measured by total debt-to-EBITDA in USD terms, reached 2.1x (considering Fitch's calculated EBITDA for CGC in USD), which is considered reasonable for the assigned rating. CGC's total debt-to-total proved reserves ratio was approximately USD4 per boe.

As of June 30, 2016, CGC's total debt was approximately USD217 million, and the company's LTM EBITDA was approximately USD104.4 million. For the six-month period ended June 30, the company's EBITDA of USD50 million represented a doubling versus y-o-y results, mainly due to the acquisition of PESA's assets and improved margins resulting from the positive impact on the company's cost structure as a result of the significant currency devaluation and cost improvements observed during 2015. These factors offset the lower domestic oil prices for the year.

CGC's EBITDA generation is expected to grow significantly, mainly from the investments made during 2015 to boost overall production, after almost nine months in which PESA had very limited investments. Fitch expects EBITDA generation for 2016-2017 to increase to USD100-USD125 million from the USD77 million reported in 2015.

KEY ASSUMPTIONS

--Double-digit currency depreciation per year;

--Average daily production levels of 25,000 boed for 2016, increasing to 29,000 boed by 2018;

--EBITDA exceeding USD100 million starting in 2016;

--Contingent on international issuance, leverage levels peaking in 2016 and declining to 1.5-2.0x in the long term.

RATING SENSITIVITIES

Negative: Future developments that could, individually or collectively, lead to negative rating actions in the short term:

--Argentina's economic deterioration and the company's inability to maintain an adequate liquidity position or access to foreign currency;

--A significant deterioration of credit metrics;

--Sustained declines in hydrocarbon reserves / production levels or failure to further develop new fields.

Positive: A positive rating action in the short term is considered unlikely. Drivers for a positive rating action or outlook in the medium term include an upgrade of Argentina's IDRs, increased diversification of the company's production profile, and consistent growth in both production and reserves while maintaining adequate financial metrics.

LIQUIDITY

Total cash and equivalents amounted to approximately USD22 million as of June 30, 2016 compared with approximately USD88 million of short-term debt. The company's cashflow generation has started to see significant improvement during 2016 as a result of the significant investments incurred during 2015 and full-year recognition of the PESA assets. This, together with the company's successful record of accessing the local markets and the available credit lines with local banks should mitigate liquidity risk exposure during 2016.

Approximately USD120 million of the company's debt becomes due within the next 24 months. The proceeds from the issuance of the bond will be used to refinance most of the company's financial debt, improving liquidity and extending the company's maturity profile.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings to CGC S.A.:

--Long-Term Foreign Currency IDR 'B'; Outlook Stable;

--Long-Term Local Currency IDR 'B'; Outlook Stable;

--International senior unsecured debt rating 'B(EXP)/RR4'.

Date of Relevant Rating Committee: Oct. 19, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013439

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013439

Endorsement Policy

https://www.fitchratings.com/regulatory

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