Fitch Ratings has affirmed National Joint Stock Company Naftogaz Ukrainy's (Naftogaz) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B', the outlook is stable, the rating agency said on its website.

"The affirmation reflects the continued equalization of Naftogaz's ratings with those of Ukraine (B/Stable) under Fitch's government-related entities (GRE) rating criteria. This reflects Naftogaz's strong links with the sovereign," it said.

"We assess Naftogaz's Standalone Credit Profile (SCP) at 'b-', mainly reflecting volatility in operations after the unbundling, uncertainty about domestic price regulation and collectability of receivables with a weaker domestic economy and FX exposure. We expect liquidity to be under pressure due to high anticipated capital expenditures as Naftogaz invests in its resource base to over time arrest a decline in gas production. We expect leverage to remain high compared to peers but stable as incurrence-based covenants limit its indebtedness," the report says.

"We expect free cash flow (FCF) to remain negative due to intensive capex. Fitch considers an estimated average $1 billion capex annually, mostly to maintain production levels and in the longer term to meet domestic demand, will add to funding requirements. Naftogaz plans to increase its resource base through exploration of new fields, developing the potential of new projects, especially the Ukrainian part of the Black Sea shelf, and start offshore exploration in 2021. We expect it to spend any cash flows above our base case on capex," Fitch said.

"Fitch expects average funds from operations (FFO) gross leverage of less than 4.0x in 2021-2024, assuming high capex needs, ongoing dividend payments of below $1 billion over 2021-2024, lower earnings due to unbundling and low gas prices," the report says.

"Naftogaz faces FX fluctuations from the currency mismatch between debt and revenue, as around 66% ($1.6 billion) of its debt related to eurobonds at end-2020 was denominated in foreign currencies (U.S. dollars and euros), while most of its revenue is denominated in Ukrainian hryvnia," it said.

"Its cash balance at end-2020 of UAH 37 billion ($1.3 billion) was denominated in foreign currency, which mitigates currency risk, although we expect the cash balance to fall, which reduces this effect. Further hryvnia depreciation against major currencies may lead to significant deterioration of the financial profile and put pressure on the eurobond covenant of net debt/EBITDA of 3.0x," according to the document.