Ratings of Wintershall Dea on review for downgrade over Russian projects ties

Credit ratings agency Moody’s has placed ratings of German oil and gas company Wintershall Dea on review for downgrade, reflecting downside credit risks stemming from the potential for additional, more severe sanctions against Russian businesses to affect the company’s operations and credit profile.

According to Moody’s statement on Thursday, the decision to place Wintershall Dea’s ratings on review for downgrade reflects the company’s meaningful exposure to Russia through several joint ventures with Gazprom to produce gas and condensate in Russia and to distribute gas through pipelines in Western Europe, which expose the company to potential indirect or direct sanctions on or from Russia.

As detailed by the agency, about 48 per cent of Wintershall Dea’s annual oil & gas production of 634 mboe/d and about 63 per cent of its 2P reserve base is in Russia. However, reflecting the relatively lower realizations of gas & oil prices in Russia compared to the remaining portfolio, Russia contributes a much lower portion of the company’s reported EBITDA of €3.7 billion and free cash flow of €2.1 billion, at 20 per cent and 24 per cent, respectively, in 2021.

Furthermore, Wintershall Dea holds a 15.5 per cent share in the offshore pipeline Nord Stream 1 and contributed a €730 million loan to the project company Nord Stream 2.

On 23 February 2022, the U.S. government added the project company of Nord Stream 2 to its SDN sanction list. In response, Wintershall Dea announced that it will impair the entire loan.

Wintershall Dea CEO, Mario Mehren, said that “the Russian President’s war of aggression against Ukraine has shaken the foundations of the company’s work in Russia to the core.”

As a consequence, the company’s management board has decided not to pursue any additional gas and oil production projects in Russia, to stop all planning for new projects, to basically stop payments to Russia with immediate effect, as well as to write off its financing of Nord Stream 2.

Additionally, the company has an equity stake in a German gas pipeline network, the WIGA Transport Beteiligungs-GmbH & Co. KG (WIGA), with a German subsidiary of Gazprom (share of 50.02 per cent for Wintershall Dea and 49.98 per cent for Gazprom).

The review period will allow Moody’s to evaluate the scope and scale of sanctions and how they could impact the credit profile of Wintershall Dea, including its ability to repatriate dividends and cash from its Russian assets.

Potential additional sanctions may result in a loss of the company’s assets in Russia as well as its stakes in Nord Stream 1 and might impact the WIGA joint venture with Gazprom, which would weaken the company’s credit profile materially, Moody’s explained.

At the same time, Moody’s noted that the company’s investments in its Russian assets benefit from investment guarantees provided by Germany. These guarantees offer some protection in specific circumstances against certain political risks, including expropriation, nationalization, wars, payment embargoes and moratoria. Moody’s will also assess Wintershall Dea’s operations outside of Russia and its credit quality if it were to lose its Russian assets.

Under Moody’s baseline scenario, a potential downgrade would likely be limited to one notch, as credit ratios are well in line with the agency’s expectations for its Baa2 rating and by year-end 2021 Wintershall Dea has excellent liquidity with €2.1 billion cash on balance and access to a fully undrawn €900 million revolving credit facility maturing in 2026.