Fitch Revises Origin Energy's Outlook to Negative; Affirms at 'BBB'
OREANDA-NEWS. Fitch Ratings has affirmed Origin Energy Ltd's (Origin) Long-Term Foreign-Currency Issuer Default Rating (IDR) and its foreign-currency senior unsecured rating at 'BBB'. The Outlook on the IDR has been revised to Negative from Stable.
The agency has also affirmed Origin Energy Finance Ltd's foreign-currency senior unsecured rating at 'BBB'.
The Outlook revision incorporates the impact of sustained low oil prices and weakness in the liquefied natural gas (LNG) markets, which have slowed the pace of improvement in the company's financial profile since Fitch's last review of Origin's ratings in October 2015. The Outlook revision also reflects the risks to Origin's credit profile should oil prices underperform against Fitch's base case assumptions, and thus reduce dividends receipts from Australia Pacific LNG (APLNG).
KEY RATING DRIVERS
Lower Contributions from APLNG: Origin's high exposure to oil and oil price-linked revenue relates largely to the dividend receipts from its joint venture, APLNG, which operates a liquefaction project. Fitch's forecasts for Origin incorporate investments required to bring the project to completion. We have also lowered the dividend receipts from APLNG to reflect the lower oil prices as well as a slower production increase over the next two years. The start of train 2 of APLNG has been delayed to 1H17, from end-2015 previously; however, remaining execution risks associated with the project completion now appear to be low.
Capital Initiatives Help: Origin's rating affirmation reflects the progress made in strengthening its balance sheet, despite continued weak oil prices. Origin raised AUD2.5bn in an equity issue in October 2015 and as announced in September 2015, is aiming for AUD2.2bn of planned cash savings through to the financial year ending 30 June 2017 (FY17), including AUD800m of cash proceeds from the sale of non-core assets. Origin will use the proceeds from new equity, lower dividend payments, non-core asset sales and capex cuts to lower its debt to counter lower dividends from APLNG.
Higher Forecast Utility Margins: EBIT margin in Origin's energy market segment improved in 1H16 to 11.2% from 9.9% in FY15 and 8.4% in FY14. Any sustained margin recovery is, however, likely to be gradual because Origin faces difficult operating conditions for its incumbent utility businesses, including competitive pressures. The recovery in the margins of this business is positive for Origin's credit profile.
Slower Improvement in Financial Profile: The company's debt reduction will help the company improve its financial profile; however, we still expect Origin's financial leverage (as measured by adjusted net debt to FFO, which includes dividends from APLNG) to remain weaker than levels comfortable for its 'BBB' ratings (of less than 3.0x) through FY18. Our forecasts do not include material investments relating to the development of the Poseidon exploration permits and any material new investment by Origin is unlikely under current oil prices.
Hybrid Issuances: Origin issued three hybrid securities of EUR1bn in September 2014, AUD900m in December 2011 and EUR500m in June 2011. Under Fitch's criteria for the treatment of hybrid securities, the September 2014 hybrid has been assigned a 50% equity credit till 16 September 2039, the December 2011 hybrid a 50% equity credit till 22 December 2031, and the June 2011 hybrid has been assigned a 50% equity credit till 16 June 2016. Origin intends to redeem the AUD900m retail notes at the first-call date in December 2016.
Fitch's key assumptions within our rating case for the issuer include:
- Gradual increase in margin for the energy markets' business
- Contribution from APLNG's liquefaction exports based on Fitch's Brent price deck
- FY16 capex of about AUD2.2bn, including AUD1bn contribution to APLNG to complete remaining capex. FY17 capex of about AUD700m and no other large investments
- Lower dividend payments of AUD265m over FY16 and FY17
Positive: The Outlook may revert to Stable at the current rating if Origin's forecast adjusted net leverage can be improved to below 3.0x and forecast FFO fixed-charge coverage above 4.5x, both on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Forecast FFO adjusted net leverage above 3.0x and forecast FFO fixed-charge cover below 4.5x, both on a sustained basis.
Negative rating action may also occur from lower-than-expected dividends from APLNG or from increased financial support from Origin to APLNG; commitment to sizeable growth capex; and margin deterioration in its incumbent utilities businesses.
Origin still has a strong liquidity position through undrawn but committed credit facilities and cash balances of AUD6.8bn as of 31 December 2015.