A multi-faceted relationship between national oil companies (NOCs) and sovereigns presents both risks and credit strengths. NOCs with high debt levels and diminished financial capacity present the greatest contingent liability risks for sovereigns, Moody's Investors Service says. Meanwhile, the impact of sovereign support and influence on NOC ratings varies.

In "Sovereigns & National Oil Companies - Relationship is a Source of Credit Strength and Risk for Both," Moody's looks at the multiple aspects of the economic, financial and policy links between NOCs and Sovereigns. The report also focuses on six NOCs, two in the Commonwealth of Independent States (CIS) and four in Latin America, where the NOCs' financial metrics suggest that they pose the highest risk to their sovereigns. The report is an update to the markets and does not constitute a rating action.

"Three main factors can jeopardize a NOC's ability to service its debt and lead to the crystallization of contingent liabilities for the sovereign: oil price shocks, more gradual but persistent losses or corporate governance risks," Moody's Vice President -- Senior Analyst Jaime Reusche says. "NOCs that pose the highest risk have a combination of relatively lower financial robustness and relatively high debt levels."

Among the Latin American countries where NOCs present the highest risk are Brazil's (Baa3 stable), with NOC Petrobras (Ba2 CFR/b2 BCA stable) and Mexico's (A3 stable), with PEMEX (A3/Aaa-mx issuer rating RUR / ba1 BCA), Petrotrin (Ba1 CFR / b1 BCA negative) of Trinidad & Tobago (Baa2 negative) and PDVSA (Caa3 FC Bond Rating/caa1 BCA stable) in Venezuela (Caa3 stable).

Both Petrobras and PEMEX are the integrated energy companies whose ratings reflect a high level of implicit support from their respective sovereigns. The Brazilian government has expressed a willingness to backstop Petrobras, and while PEMEX's monopoly position and relevancy to government finances has weakened, lower oil prices have been enough of a drag to prompt economic support from Mexico. PEMEX's rating is currently on review for downgrade. In February, Petrobras was downgraded to Ba2 from Baa1.

We also assume a high level of governmental support for PDVSA (Caa3 FC Bond Rating/caa1 BCA stable), Venezuela's (Caa3 stable) NOC, given high interventionism, poor corporate governance and the importance of PDVSA to the government's finances.

"In LatAm, of the eight NOCs that we rate, the largest increase in debt relative to the size of the economy over the last five years has been in Venezuela's PDVSA. This particular NOC faces greater sovereign risks than all of its rated peers and has the lowest rating," Reusche says.

KazMunayGas JSC (KMG, Baa3 issuer rating / ba3 BCA stable) is owned by Kazakhstan's government via a fund mandated by the state to protect its interest in the oil and gas sector. KMG contributed 11% of total government revenues in 2014 and depends on governmental support for energy exports. Such support, combined with strong corporate governance mitigate the risks implied by lower oil prices.
Source: Moody's