Fitch Ratings has affirmed Compania General de Combustibles S.A.'s (CGC) Long-Term Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDR) at 'B-'.

The Rating Outlook is Stable. Concurrently, Fitch has withdrawn the ratings.

The affirmation reflects CGC's businesses profiles that have proved to be resilient, over the years, to a deteriorating macroeconomic environment plagued with inflation and devaluation of the local currency. The company has maintained its adequate leverage profile, liquidity, of which a large portion is held in USD abroad, combined with exports that help mitigate the impact of capital controls.

The ratings were withdrawn for commercial reasons.

Key Rating Drivers

Weak Operating Environment: CGC's ratings are capped by the country ceiling of Argentina, given its exposure to the federal government through gas purchasing agreements (Plan Gas Ar.) over the rating horizon. Argentina's energy sector is influenced by the government, as it is a strategic sector for economic growth and revenues (through taxes, royalties, and exports). It also relies on government subsidies to incentivize gas development.

Production Profile: CGC's production is projected to reached 60,000boed in 2023. As of end of June 2023, CGC was the sixth largest gas producer and seventh largest oil producer in Argentina. CGC's 1P reserve base increased by 16% to 141mmboe, and its 1P reserve life was 7.8 years. The company has a diversified operation and production profiles, that include sites in San Jorge, Neuquina, and Cuyaya basins. These are prolific basins, and Cuyyana falls within the prolific Vaca Muerta area, complementing CGC's existing operation in the Austral basin.

Stable Cash Flow Profile: Fitch's rating case estimates FCF will be negative in 2023 as the company deploys USD450 million in capex to its assets located in the San Jorge and Austral basins. CGC's cash flows are supported by contracted revenues under Plan Gas Ar 4 (PG5) achieving the extension of gas contracts until December 2028, with a maximum price of USD 3.46 MMBTU for the contracts plus incremental volume above the base curve, at an additional price starting at USD9.5 MMBTU. The company's exposure to potential payment delays by the government, is mitigated through its oil production, which will partially be exported, and non-contracted gas sales.

Transitory High Leverage: CGC's gross leverage is expected to be close to 4.0x in 2023, and then descend below 3.0x by 2026. Total debt to 1P is expected to be USD7boe in 2023, as the company finances most of its Austral and Golfo San Jorge projects with debt. CGC has roughly USD42 million of debt maturing in 2023. The largest portion comprises of USD200 million of optional convertible bonds due in 2028. The rating case assumes that debt will be at or below USD1 billion over the rating horizon.

Derivation Summary

CGC's (B-/Stable) credit profile compares favorably to Argentine corporates Pampa Energia (B-/Stable) and Capex S.A. (CCC+) and to other small independent oil and gas companies in the region. The ratings of GeoPark Limited (B+/Negative), SierraCol Energy (B+/Stable), Gran Tierra Energy International Holdings Ltd. (GTE)(B/Stable), and Frontera Energy (B/Stable) are constrained to the 'B' category, given the inherent operational risks associated with small scale and low diversification of their oil and gas production profiles.

CGC is an energy company, and its business profile compares mostly to Capex and Pampa's upstream business, but both Capex and Pampa are diversified energy companies that generate majority of cash flows from power generation, thus they are more exposed to CAMMESA. Both Pampa and CGC are leaders in Argentina in their respective business operations.

CGC produces both oil (38%) and gas (62%) exclusively in Argentina, which limits its ratings, its off-taker and impact of capital controls. Nonetheless, its pro forma production size compares favorably to other 'B' rated oil and gas E&P producers, which will constrain its rating to the 'B' category. These peers include Canacol, Geopark, SierraCol, Gran Tierra Energy, and Frontera Energy.

Key Assumptions

Operations

Oil and gas production to average 63,000 boe/d over the next four years;

Average realized natural gas price of USD5.00mmBTU flat over the rating horizon under PG5;

Average realized Brent price of USD76bbl in 2023, USD71bbl in 2024, and USD55bbl long term;

Capex of USD450 million in 2023; annual average of USD200 million between 2024 and 2026;

Lifting cost (COGS - D&A) of USD26/boe average between 2023-2026;

Selling expenses are USD2/ boe flat from 2023-2026;

SG&A expenses are USD2/boe flat from 2023-2026;

Exploration expense are USD 0.2/boe flat from 2023-2026;

Reserve replacement ratio of 105% per annum.

Financial:

Fitch Average and EOP ARS/USD exchange rates;

Dividends received of USD5 million per annum 2023-2026;

Dividends paid of USD10 million per annum 2023-2026;

Debt outstanding remains at or below USD1 billion over the rating horizon.

RATING SENSITIVITIES

Rating sensitivities are not applicable as the ratings have been withdrawn.

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

Adequate Liquidity: CGC reported USD240 million in cash and cash equivalent in 1Q23, sufficient enough to cover debt maturities in the next 18 months. The company's debt was USD1.1 billion by the end of June, composed by USD187 million in short-term debt. The rating case assumes that CGC will tap local markets to replenish its cash position in need arises, and debt at or below USD1 billion over the rating horizon.

Issuer Profile

CGC is an energy company with operations in Argentina, engaged in the development, production and exploration of natural gas, crude oil, LPG (upstream business) and with a significant interest in a network of pipelines in northern and central Argentina.

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

CGC has an ESG Relevance Score of '4' for GHG Emissions & Air Quality due to the growing importance of policies designed to limit the greenhouse gas (GHG) emissions from the production of oil and gas and potentially lessening demand, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Following the withdrawal of ratings for CGC Fitch will no longer be providing the associated ESG Relevance Scores.

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