Fitch Ratings affirmed Capex S.A.'s Long-Term, Foreign Currency (FC) Issuer Default Rating (IDR) at 'CCC+' and Local Currency (LC) IDR at 'CCC+'.

Fitch has also affirmed the company's USD300 million senior unsecured bonds due 2024 at 'CCC+'/'RR4'.

Capex S.A.'s ratings reflect its dependence on CAMMESA (Compania Administradora del Mercado Mayorista Electrico S.A.), which acts as an agent on behalf of whole market participants, for gas and electricity payments. Due to its reliance on subsidies from the government, CAMMESA's credit quality is strongly related to Argentina's sovereign (CCC). Capex is rated one notch higher than the sovereign since its oil business, which sells to local oil refineries with a history of timely payments. The company's oil business accounts for nearly half of its revenue and between 20% and 30% of EBITDA.

The recovery rating on the USD300 million senior unsecured notes due 2024 is capped at 'RR4' since per its 'Country-Specific Treatment of Recovery Ratings Criteria'. The expected recovery for 'RR4' is 31% to 50%.

Key Rating Drivers

Heightened Counterparty Exposure: Capex's electric business depends on payments from CAMMESA, which acts as an agent on behalf of an association representing agents of electricity generators, transmission, distribution and large consumers or the wholesale market participants (Mercado Mayorista Electrico; MEM). Payment delays from CAMMESA were approximately 79 days in June 2021 after reaching a peak of 88 days in early 2020. Capex's working capital is less pressured since the off-takers for its oil sales are local refineries, which typically pay within 30 days. Fitch expects oil to account for more than half of Capex's revenue.

Weak Operating Environment: Capex's ratings reflect regulatory risk given strong government influence in the energy sectors. Capex operates in a highly strategic sector where the government both has a role as the price/tariff regulator and also controls subsidies for industry players. Fitch believes Capex's oil and gas business will continue to remain the main contributor to the company's cash flow stability. Fitch estimates that oil and gas production comprised 58% of 2021 EBITDA followed by approximately 28% from the electric business. Over the rating horizon, oil and gas business will remain a key contributor to cash flow generation, representing approximately 65% of the company's consolidated EBITDA.

Impact of Capital Controls: Fitch believes Capex will not be vulnerable to the central's bank most recent capital controls due to its long-dated maturity profile. Argentina's central bank announced that corporates with foreign currency debts maturing between Oct. 15, 2020 and March 31, 2021 would need to present a refinancing plan to the central bank, would have their access to the foreign exchange market limited to 40% of the maturing debt and refinancings would need an average life of 2+ years. Approximately 98% of Capex's USD-denominated debt is in the form of a bullet bond due in 2024. As of July 2021, the company had only USD4.4 million in short-term dollar-based debt, which is manageable for Capex.

Pesification of Energia Base: Fitch expects the pesification of Energia Base, or denominating it in pesos instead of dollars, to result in a 23% decline in Capex's realized thermal energy price, to USD12.64/MWh in 2021 from USD16.50/MWh in 2020. Fitch expects this, along with lower demand, to decrease thermal electricity revenue to USD40 million in 2021 from USD60 million in 2020. In February 2020, the Secretary of Energy declared an economic and energy emergency and changed Energia Base's capacity and variable prices to a fixed amount in pesos, thus reducing generators' future compensation in hard currency terms should the pesos continue to depreciate. Energia Base applies to non-power purchase agreement (PPA) generators, such as Capex.

Advantageous Vertical Integration: Capex is an integrated thermoelectric generation company whose vertically integrated business model gives it an advantage over other Argentine generation companies, especially given existing gas limitations in the country. Capex benefits from operating efficiencies as an integrated thermoelectric generation company and the flexibility from having its own natural gas reserves to supply the plant. Capex's generating units are efficient and the proximity to its natural gas reserves in the Agua del Cajon field coupled with gas transportation restrictions from Neuquen basin to the main consumption area in Buenos Aires reduces its gas supply risk.

Small Production Profile: Capex has a small and concentrated production profile, and its asset base as well as all of the company's proved (1P) reserves and production are concentrated in Argentina. This limited diversification exposes the company to operational and macroeconomic risks associated with small-scale oil and gas production. Fitch expects the company's production to be on average roughly 15,000 boe per day (boed) from 2021 to 2024, being gas production is approximately 55% of total output. As of April 2021, 35% of the company's gas reserves and 52% of its oil reserves were developed.

Adequate Hydrocarbon Reserves: Fitch believes Capex has an adequate reserve life of 12.4 years 1P and 14.6 years 2P providing some flexibility to reduce capex investments if needed. As of September 2021, Capex had 1P reserves of 55.8 million boe with 60% related to gas. The company has strong concession life that exceeds the life of its 2024 bond, with Agua del Cajon concession expiring in 2052, and recently acquired blocks: Pampa del Castillo O&G Field expiring in 2046, La Yesera in 2037, Loma Negra (RN Norte) in December 2034 and Bella Vista Oeste in 2045. La Yesera's and Loma Negra's concessions each include recently signed ten-year extensions.

Manageable Investment Plan: Fitch believes that Capex's investment plan is manageable and that future investments will be financed through the company's cash flow generation, without requiring additional debt in the 2021 fiscal year. The investment plan for the period 2022 to 2025 is approximately USD380 million, mainly concentrated in Oil & Gas fields with Pampa del Castillo representing 53% of total investment, Agua del Cajon/Rio Negro 13% and newly-acquired Bella Vista Oeste and Parva Negra 12% and 5%, respectively.

Moderate Medium-term Leverage: Fitch expects Capex's 2022 leverage to fall to 2.3x due to higher oil prices and demand as well as the inflation adjustment to Energia Base but is expected to rise to 2.9x by 2025 due to lower oil prices, the pesification of compensation for non-PPA electricity generators and the inflation effect of its dollar-denominated debt. Fitch expects average EBITDA interest coverage to be strong at an average of roughly 6.0x over the rating horizon. Leverage will be more moderate on a net basis at 2.1x in 2022 due the Capex's high cash balance and rising to 2.8x in 2025.

Derivation Summary

As a vertically integrated energy and electricity company, Capex S.A.'s LT FC and LC ratings of 'CCC+' reflect its exposure to CAMMESA as an offtaker for its electricity and gas revenues as well as private offtakers for its oil revenues. It is rated one notch below Petroquimica Comodoro Rivadavia S.A (PCR; B-/Stable), which has a notable percentage of its EBITDA from exports, offshore EBITDA from Colombia (BB+/Stable) and offshore hard currency. Pampa Energia S.A. (B-/Stable), MSU Energy (CCC) and Generacion Mediterranea S.A. (CCC) are rated one notch lower due to their operational exposure to Argentina and overall regulatory risk.

Capex S.A. is a small oil & gas producer with operation exclusively in Argentina. Capex's production is expected to stay at an average of 15,000boed through 2021-2024, which is less than its peers CGC with an average of 30,000boed and PCR with an average of 20,000boed. Capex has a strong 1P reserve life of 12.4 years compared PCR reserve life of 7.2 years and CGC reserve life of 5.0 years.

Capex's gross leverage is expected to fall to 2.3x in 2022 due to higher oil prices and demand as well as the inflation adjustment to Energia Base but is expected to rise to 2.9x by 2025. Capex's expected medium-term leverage is slightly higher than that of oil and gas peers CGC (1.3x in 2022 and 2023), PCR (1.7x in 2022 and 1.4x in 2023) and Pampa Energia (2.2x in 2022 and 2.3x in 2023). Unlike most of its oil & gas peers, Capex does have a more diversified business model with its power generation segment. As an integrated energy company, Capex compares best with Pampa Energia.

Key Assumptions

Natural gas production of approximately 7,300boed in 2022 and 6,800boed thereafter;

Realized natural gas prices at USD2.4/MMBTU during 2022-2025;

Oil production reaching approximately 7,500boed in 2022 and 8,300boed thereafter;

Fitch's Price deck for Brent oil prices adjusted for Capex's FYE of April 30 at $60.33/barrel during 2022, $54.33 in 2023, $53 in 2024 and 2025;

Annual electricity production of approximately 3,800GWh;

Electricity prices denominated in Argentine pesos around USD12.00/MWh in 2022 and USD11.50/MWh thereafter, reflecting new tariff scheme;

Diadema Wind Farm average availability factor from 2022-2025 at 96% and average load factor of 49% with an average PPA price of USD103/MWh;

Total capex of approximately USD380 million between 2022-2025, mostly concentrated in the fields of Pampa del Castillo and Agua del Cajon;

No dividends payments between 2021 through 2024.

Key Recovery Rating (RR) Assumptions:

The recovery analysis assumes that Capex would be going concern in bankruptcy;

Fitch has assumed a 10% administrative claim;

The 50% advance rate is typical of inventory liquidations for the oil and gas industry;

30% EBITDA decline during bankruptcy;

6.0x going concern EV/EBITDA multiple;

The Recovery Rating is limited to 'RR4' and the bond's rating is limited to its issuer's IDR of 'CCC+' since Argentina is classified as a Group D country in Fitch's Country-Specific Treatment of Recovery Ratings Rating Criteria.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade to the ratings of Argentina could result in a positive rating action;

Net production rising on a sustainable basis to 35,000boed;

Increase in reserve size and diversification and maintaining a minimum 1P reserve life of at close to 10 years;

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade by more than one notch of Argentina's country ceiling;

A reversal of government policies that result in a significant increase in subsidies coupled with a delay in payments for electricity sales;

Sustainable production size decreased to below 10,000boed;

Reserve life decreased to below seven years on a sustained basis;

A significant deterioration of credit metrics to total debt/EBITDA of 4.5x or more.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity: As of September 2021, Capex S.A. had available cash of USD100 million, which is sufficient to cover gross interest expense by more than 5.0x. The cash is held offshore in US dollar accounts. The company also has available USD111 million in approved credit facilities. Capex's main financial obligation is a USD300 million bond due in 2024 and it has minimal near-term maturities. Fitch expects the company to maintain this strong liquidity position over the rating horizon.

Issuer Profile

Capex S.A. is an integrated Argentine company dedicated to the exploration and exploitation of hydrocarbons and the generation of thermal and renewable electricity.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

RATING ACTIONSENTITY/DEBT	RATING	RECOVERY	PRIOR
Capex S.A.	LT IDR	CCC+ 	Affirmed		CCC+
	LC LT IDR	CCC+ 	Affirmed		CCC+

senior unsecured

LT	CCC+ 	Affirmed	RR4	CCC+

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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