The agency also upgraded Gazprom subsidiary Gazprom Neft [RTS:SIBN] to BB+ from BB. The outlook on the ratings is stable.
"The upgrade of Gazprom reflects the increasingly favorable pricing environment for both domestic gas sales and for exports to the former Soviet Union and Europe," a statement said. "Gazprom should in 2006 see evidence of strong free cash flow for the first time."
S&P said it sees Gazprom's business risk profile as satisfactory, but its financial risk profile, although improving, remains aggressive, due to rising capital expenditures, acquisition risk, a large debt burden, and high short-term debt.
The ratings are constrained by several factors, including Gazprom's stand-alone credit quality, to which one notch was added due to expectations of extraordinary support from the government, its majority shareholder, the agency said.
However, the agency continues to differentiate between the corporate and sovereign ratings, "because Gazprom's operations are autonomous and the Russian government's willingness to provide timely financial support is uncertain."
"Rating upside is currently limited because of the company's ambitions for
debt-financed acquisitions. Failure to maintain momentum during the rise of
domestic gas prices and cost inflation containment could also limit rating
upside. Very large debt-financed acquisitions could pressure the ratings if
not offset by higher state support," the statement said.
