This week, the Fitch Ratings Agency affirmed a BBB- rating for Romgaz, with a stable outlook. In this brief research piece, we bring you the main highlights that led to this decision.

Romgaz received a one-notch uplift from its ‘bb+’ to BBB- rating with Stable Outlook from the Fitch Ratings Agency. This rating reflects Romgaz’s dominant position in Romania’s natural gas market, upstream production growth potential and conservative financial policy. Below we provide you with a summary of key rating drivers.

Large CAPEX Plans: Romgaz has ambitious plans to develop Neptun Deep, a deepwater offshore project in the Romanian Black Sea. Romgaz acquired a 50% stake in the project for EUR 1 bn in 2022 partnering with OMV Petrom, Neptun Deep’s operator. The development plan includes the infrastructure of 10 wells and an offshore platform, with production expected to start in 2027, reaching a gross plateau production of approximately 8 billion cubic meters (bcm) annually. Romgaz and OMV Petrom will invest up to EUR 4 bn in the project. According to the Fitch, this project is seen as a transformational project for Romgaz. It will allow Romgaz to increase natural gas production by half to around 150 thousand barrels of oil equivalent per day. The project will also secure Romania’s energy independence and position the country as the EU’s largest natural gas producer from domestic resources. Finally, Fitch views execution risk as manageable given the partner’s experience in the development of oil and gas projects so far.

Leverage to Temporarily Spike: Romgaz has historically operated with a net cash position, reflecting its prudent financial management. Fitch forecasts EBITDA net leverage to rise through 2026 due to significant CAPEX in the aforementioned project. However, Fitch also expects net leverage to decline from 2027 as new projects contribute to EBITDA. Romgaz’s financial policy assumes EBITDA net leverage below 2.0x.

‘Very Strong’ Decision-Making and Oversight: The Romanian government exercises significant control over Romgaz’s decision-making, including its operational activities, financial performance, funding structure, and investment plans. This control is evident through the government’s 70% ownership stake, and its oversight is robust, with Romgaz being subjected to frequent, periodic reporting on key operating and financial indicators.

Strategy Focused on Higher Production: Romgaz’s 2021-2030 strategy focuses on enhancing the value of its core activities, natural gas production and trading, while pursuing decarbonisation. Key strategic goals include reducing carbon and methane by at least 10%, limiting annual natural gas production decline from legacy assets to below 2.5%, maintaining an EBITDA margin of 25-40%, and achieving a return on average capital employed of 12% or higher. Romgaz also plans to reach net zero CO2 emissions by 2050.

Generous Dividend Payments: Romanian state-owned enterprises have historically been required to distribute at least 50% of net profits as dividends. For 2023, Romgaz was authorised by the government to allocate only 20% of its profits for dividends in 2024 due to anticipated large CAPEX, which is in line with exemptions from dividend policy for state-owned companies realising major energy projects. However, rating agency expects that Romgaz will return to its standard, higher dividend distributions in 2025. However, the extension of lower dividend payments during Neptun Deep development cannot be ruled out and would represent an upside to our forecasts.

Regulated Gas Prices: In response to the Russia-Ukraine war, the Romanian government implemented regulations to protect consumers in the gas supply market that expire in March 2025. From April 2024, the capped price was partially reduced. The rating agency expects the measures will not be extended, but the impact of an alternative scenario on Romgaz’s financials would be positive due to lower taxation from regulated prices.

On the flip side, the key rating constraints include its comparatively modest production scale, lack of geographic diversification due to its sole focus on Romania, the aging nature of its legacy gas assets, large CAPEX and manageable execution risk.