Standard & Poor's placed MOL’s ‘BBB-’ long-term corporate credit rating on CreditWatch with negative implications on Friday. The move is the result of MOL’s statement that it has submitted a bid for Russia’s oil production company OAO Udmurtneft.
TNK-BP, current owner of Udmurtneft has indicated that the sale price could be some $ 3bn. According to S&P such spending would worsen MOL’s risk profile, especially as the group is expected to spend another $ 0.9bn–1.0bn on repurchasing shares later this year.
At the end of last year, MOL's total outstanding debt was close to $ 2bn, which we expect to disappear almost fully by the end of March due to sale of its own shares to Magnolia and disposal of the natural gas business to E.ON. According to our estimates, if MOL intends to keep the targeted 40% net-debt-to-assets ratio, its financing ability is some $ 3.0bn–3.5bn via new debt, which is very close to Udmurtneft’s price and leaves no room for share repurchase in 1H 2006.
However, we still do not believe that MOL is the most likely buyer of Udmurtneft, as the company is only one of 18 bidders, including major Russian, Indian and Chinese companies. We therefore expect S&P to lift MOL from its watchlist after the release of the first quarter earnings, in which the company is likely to report an almost zero net debt position.
We keep our Buy recommendation on the stock with our price target of HUF 29,033 per share.