Fitch Ratings says in a new report that the credit outlook for the central European (CE) oil and gas sector is stable for 2010 as most rated companies in the region should be able to maintain their credit profiles and ratings next year. However, the 2010 outlook for oil refining, which was affected globally by extremely weak market conditions in 2009, is negative as the agency does not expect any major recovery in this sub-sector in 2010.

"Fitch expects that the CE oil and gas companies will continue to focus on preserving free cash flow in 2010, by maintaining strict control of operating and capital expenditure as 2010 is likely to be another difficult year for the oil and gas industry, although some modest recovery is likely in many sub-sectors," said Arkadiusz Wicik, Director in Fitch's European Energy, Utilities and Regulation team. "Fitch's projections for CE companies assume anaemic GDP growth in 2010 and relatively flat demand for oil products and gas on decreased 2009 levels".

Many CE companies have substantial debt, close to or exceeding their target leverage or gearing ratios and, as a result, Fitch believes they are less likely to pursue large debt-funded acquisitions. An additional challenge for lower-rated companies is the availability and cost of debt funding in the form of bank loans and bonds, in particular long-term funding.

The agency believes that leading integrated oil and gas companies with prudent financial strategies, such as Austria's OMV ('A-'/Stable), or gas companies with substantial cash flow contributions from more stable and predictable transmission and distribution businesses, such as Slovakia's Slovensky plynarensky priemysel, a.s. (SPP, 'A'/Stable) are in a good position to maintain their healthy credit profiles in 2010 despite continued challenges for the industry. Fuel marketing companies operating large and efficient networks, for example Turkey's largest fuel distributor Petrol Ofisi A.S. ('BB-'/Stable) which showed resilience to the downturn in 2009, are also expected to generate healthy funds from operations (FFO) in 2010.

Conversely pure refining companies, which were clearly the most affected in 2009, are expected to witness another difficult year with depressed refining margins and low utilisation rates in 2010. Fitch believes that those refining operations that either enjoy additional sales margins on top of the cyclical and volatile benchmark refining margin due to favourable locations, have strong and sustainable domestic market shares, or strong logistic bases and extensive petrol station networks, are in a better position to weather the recession.

Examples of such companies include Poland's Polski Koncern Naftowy ORLEN S.A. (PKN, 'BB+'/Rating Watch Negative), Turkiye Petrol Rafinerileri A.S. (TUPRAS, 'BBB-'/Stable) or refining and marketing business of Hungary's integrated oil and gas company MOL Plc.

Fitch believes that refiners with higher financial leverage, for example as a result of large debt-funded acquisitions completed when refining asset prices were higher, like PKN, or sizeable capex for major refinery upgrades, like Poland's Grupa Lotos S.A., are likely to see materially worsened credit metrics in 2009 due to weak FFO and EBITDA. This will exert pressure on credit profiles next year unless addressed by the companies' deleveraging initiatives, or additional cash flow from newly-commissioned capacity (if the new supply balances with existing local demand).

Fitch's outlook for those refining companies that have a prudent financial strategy with limited usage of debt, such as TUPRAS, is stable for 2010 as they have the financial headroom to withstand a longer period of weak margins without compromising their credit profiles.