The rating follows a review of the company's first-half 2007 performance. Standard & Poor also said in a news release it had upgraded the Russian national scale rating to ruAA from ruAA.
"The upgrade reflects Novatek's strong financial metrics, with no net debt and strong profitability, and the gradually improving fundamentals of the Russian gas industry," said S&P credit analyst Elena Anankina.
The agency said Russian gas industry risks - notably very low domestic gas prices and
operational dependence on the pipelines of state-controlled Gazprom - remained the key constraints on the rating on Novatek.
"Nevertheless, the company's very low cost position and a degree of diversification between natural gas, gas condensate, and crude oil help to offset those risks," the agency added.
Novatek's prices are not regulated, but indirectly pegged to Gazprom's, which are set very low by the regulator. Although Novatek cannot export gas, its exposure to downside price fluctuations is effectively limited by the semi-regulated nature of the industry.
The government's plan to more than double regulated gas prices to $125 per thousand cubic meters by 2011 provides a good benchmark for Novatek to increase its price forecasts.
Novatek remains a relatively small player, with only 4% of Russia's gas production and a geographically concentrated reserve base. Gazprom's 19% stake in Novatek gives it some influence on the company's strategy.
"We expect that the rating on Novatek could be raised by one notch in the next 12 months, as Novatek continues to benefit from the fundamental improvements in the Russian gas industry. In particular, we will focus on how the government's plan to raise domestic gas prices is implemented in 2007-2008," the agency said.
