Fitch Ratings has affirmed
The Short-Term Foreign-Currency IDR has also been affirmed at 'F1+'. The Outlook on the Long-Term IDR is Stable.
KNOC's ratings are equalised with those of
Key Rating Drivers
'Very Strong' State Linkages: We assess KNOC's status, ownership and control as 'Very Strong'. The Korean government fully owns KNOC under the KNOC Act, which differentiates it from other domestic Fitch-rated GREs. It also directs and supervises KNOC's investments and financial plans and monitors its financial profile. We assess KNOC's support record as 'Moderate', as it has received periodic capital injections, but despite this, KNOC's financial profile remains weak.
'Very Strong' Default Implications: We assess the socio-political and financial implications of a KNOC default as 'Very Strong' for the government, as KNOC manages the country's strategic oil and gas reserves. Its default would jeopardise the energy security of
Robust Profit, but on Downward Trend : We expect revenue and profit, which has shown robust growth in the past two years, to gradually decline over the next two to three years, along with falling oil and gas price assumptions. We estimate that KNOC's revenue and profit improved significantly in 2022, reflecting higher oil and gas prices. KNOC posted yoy revenue growth of 41% and EBITDA growth of more than 70% in 1H22. Production fell in 2021 due to a decline in KNOC's major mature fields, but remained stable in 1H22, as production began at
Near-Term Positive Free Cash Flow: KNOC's free cash flow turned positive in 2021, with higher oil and gas prices and we expect the company to maintain positive free cash flow for the next two to three years, despite expectations of higher capex and declining prices. We forecast capex to range from
Weak Standalone Credit Profile: The company's 'b' Standalone Credit Profile (SCP) reflects its high leverage and weak business profile due to the high cost nature of its production assets. This is mitigated by robust financial flexibility as a major Korean GRE. We expect EBITDA net leverage to improve to around 8x in 2022, from 14x in 2021, amid robust oil and gas prices. It is expected to start deteriorating from 2023 with lower price assumptions.
Derivation Summary
KNOC's ratings are equalised with those of
We assess KNOC's status, ownership and control as 'Very Strong', against 'Strong' for
We assess all three peers as having 'Very Strong' socio-political and financial implications of default, as a default by KNOC,
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Brent oil prices of
Production volume of 116,000 barrels of oil equivalent a day in 2022 and 114,000 in 2023-2024
Capex of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on the sovereign, provided the likelihood of sovereign support remains intact.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on the sovereign.
Weakening of the sovereign's likelihood to support KNOC.
For the sovereign rating of
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Public Finances: A significant rise in government debt/GDP, for example as a result of sustained increases in fiscal deficits or materialisation of contingent liabilities.
Economic or financial sector distress resulting from impaired household debt-servicing ability; for instance, from a structural deterioration in the labour market.
Structural: A rise in geopolitical risks on the Korean peninsula sufficient to severely worsen
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Structural: A structural easing of geopolitical risk to levels more in line with rating peers.
Structural: Improved governance standards, for example through reforms to reduce ties between politics and business.
External: Continued current account surpluses that contribute to a sustained improvement in the net external creditor position, and greater resilience to external financial shocks.
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 '
Liquidity and Debt Structure
Adequate Liquidity: KNOC's short-term debt was
Issuer Profile
KNOC is a 100% government-owned energy oil and gas company, focusing on upstream exploration and production. It also manages
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.
Public Ratings with Credit Linkage to other ratings
KNOC's ratings are equalised with those of its major shareholder,
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
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