Fitch Ratings has assigned Ukraine-based gas producer DTEK Oil & Gas B.V. (DTEK O&G) a first-time Long-Term Issuer Default Rating (IDR) of 'B-' with a stable outlook, the rating agency said on its website.

"Fitch has also assigned DTEK O&G's notes, issued by NGD Holdings B.V., a senior unsecured rating of 'B-' with a Recovery Rating of 'RR4'," it said.

"The 'B-' rating is constrained by the company's small scale of operations as a gas and gas condensate producer in Ukraine, moderately high leverage and evolving corporate governance practices, including a complex group structure and related party transactions," the agency noted.

"The rating also reflects moderate production costs supporting stable profitability, good 1P reserve life, a reserve replacement ratio above 100%, providing the necessary basis for sustaining the production profile, and satisfactory liquidity," according to the document.

"DTEK O&G has two licenses for gas and gas condensate production at the Semyrenkivske and Machukhske fields and a newly obtained license at the Zinkivska site in Poltava region of Ukraine as of the beginning of 2021. The company produced around 1.8 billion cubic meters (bcm) of gas in 2020, about 9% of natural gas production in Ukraine. We assume the group will maintain this level of production over 2021-2024 with average annual investment of UAH 2.4 billion for the same period," Fitch said.

"DTEK's assets should generate strong cash flows, even in a low gas price environment. In 2020, DTEK's cash operating expenses averaged $7/barrel of oil equivalent (boe) and we project capex to remain around $7/boe in the next four years. DTEK's relatively low costs and maintenance capex needs support solid free cash flow generation. In 2020, the company's unit funds from operations (FFO) was $14/boe ($22/boe in 2019) and we expect the EBITDA margin to remain around 70% in 2021-2024," Fitch experts said.

"DTEK O&G's wholly-owned HoldCo NGD Holdings B.V. has issued $425 million new notes, with $50 million annual amortization from December 31, 2023 and maturity at December 31, 2026 ... At the same time, after issuing these notes, DTEK O&G offset its loan payable to related party with a balance value of around $500 million or UAH14 billion equivalent (including $94 million effect of discounting) towards DTEK Energy," the report says.

"Additionally, post-corporate reorganization before May 2021, all greenfield projects with high geological risk have been transferred to a newly created DTEK O&G's sister company, DOG Development. In case of any DOG Development subsidiary comprise more than 10% of DTEK O&G EBITDA, then such company will become a guarantor/suretor under notes," Fitch stated.

"As of end-2020, DTEK O&G had sold most of its gas production to a related party under control of DTEK B.V. After August 2021, the gas will be sold to D. Trading, another subsidiary of DTEK B.V. and DTEK O&G's sister company. For 2021, 70% of the volumes have been hedged at $155 per 1,000 cubic meters of gas," the report notes.