Fitch Affirms ENAP's Foreign Currency IDR at 'A'; Outlook Positive

2008-05-30 23:40:21 -

- Fitch Ratings has affirmed Empresa Nacional del Petroleo (ENAP) as follows:

--Foreign currency IDR at 'A'

--National long-term rating at 'AAA(chl)'

--US$290 million senior unsecured notes due 2012 at 'A';

--US$150 million senior unsecured notes due 2014 at 'A';

--UF3.25 million senior notes due 2012 at 'AAA(chl)' (approximately US$147 million).

The Rating Outlook is Positive for ENAP's foreign currency IDR, while ENAP's national scale rating carries a Stable Outlook.

ENAP's foreign currency IDR and Positive Outlook continue to be underpinned by its state ownership, government support, dominant market share and strategic importance to the Republic of Chile (long-term foreign currency IDR 'A' rated 'A' with a Positive Outlook by Fitch). ENAP is inextricably linked to the Republic of Chile as the country's primary hydrocarbon fuel supplier. The company also plays a key role in Chile's national energy security as evidenced by its leading role in the consortium developing the new Quintero LNG project.

However, it is important to underscore that ENAP's decreasing refining margins and cash flow have been adversely affected by the natural gas shortage in Chile, higher crude oil feedstock prices, and increased diesel fuel use at ENAP's refineries. As a result, ENAP's deteriorating credit measures place it well below its current rating category on a standalone basis. The company's ratings could come under pressure if there is evidence of insufficient government financial support or policies that are deemed to be not supportive of ENAP.

The combination of high crude prices and increasing domestic demand for diesel has placed increasing pressure on ENAP's cost structure and cash flow. During first quarter-2008 (1Q'08), ENAP's operating margins were adversely affected by a combination of the increased operating costs associated with running refineries with high-priced diesel fuel instead of natural gas and importing additional diesel fuel to meet domestic market demand. During 2007, Chilean diesel demand increased by 51% to 9.5 MM m3 compared to 2006; ENAP's refining production met 40% of diesel demand. The remaining 30% was met by ENAP's imports and 30% by other importers, mainly Empresas COPEC (Fitch rated 'BBB+'). For the next two years, ENAP's refineries have been configured to maximize the production of diesel to meet Chile's heightened demand for diesel amidst the current natural gas shortage.

ENAP is highly vulnerable to fluctuations in the commodity cycle as evidenced by the dramatic increase in crude oil prices, which have pressured ENAP's refining margins. ENAP's refining margins decreased to US$6.4/barrel in 1Q'08 as the cost of crude oil feedstocks increased more rapidly than prices of its refined products, which are benchmarked off of US Gulf coast prices. In addition to its significant refining business, ENAP participates in exploration and production (E&P) of crude oil and gas in Argentina, Chile, Egypt, Ecuador and Iran; revenue and cash flow contributions from these activities are quite small compared to the refinery business and cannot mitigate fluctuations on the downstream business.

Over the near term, ENAP is expected to increase short and long term borrowings to meet working capital needs and other funding requirements that could reach up to US$900 million at current crude price levels. The company has access to various bank lines and the capital markets and has a manageable debt maturity schedule with no significant maturities until 2011. As of latest twelve months (LTM) March 31, 2008, total adjusted net debt to EBITDA was approximately 3.8 times (x). Over the near to medium term, Fitch expects ENAP's leverage to significantly increase to levels exceeding 12.0x as EBITDA remain at well below historic levels.

ENAP is Chile's leading hydrocarbon company, with its core business in refining with small-scale E&P operations both domestically and abroad. The company has three refining plants (Aconcagua, Bio Bio, and Gregorio) and produces and sells fuel in the local market, as well as exports a small portion of its production. ENAP is 100% owned by the state of Chile. ENAP is organized as a holding company, with two primary business lines: E&P and Refining, Logistics & Commercialization.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
Gianna A.Z. Bern, +1-312-368-3217 (Chicago)
M. Beatriz Moreno B., +562-499-3315 (Santiago)
Christopher Kimble, +1-212-908-0226
(Media Relations, New York)