OREANDA-NEWS. June 17, 2015. Fitch Ratings has affirmed Ras Laffan Liquefied Natural Gas Company Limited (II)'s (RasGas (II)) and Ras Laffan Liquefied Natural Gas Company Limited (3)'s (RasGas (3)) (together, the company or RasGas) senior secured bonds at 'A+' with Stable Outlooks. The obligations of each issuer are guaranteed by the other entity. A full list of rating actions is available at the end of this commentary.

Fitch expects RasGas to be able to easily withstand the current oil price environment, due to its exceptionally high financial flexibility and competitive position. These strengths are of critical importance in supporting the bonds' 'A+' rating despite mostly Midrange individual key rating driver assessments. The Stable Outlook is supported by the company's strong operating track record.

KEY RATING DRIVERS

Gross Revenue Risk: Midrange
We expect RasGas's revenues in 2015 to be substantially lower than 2014 levels (USD27.8bn), due to lower oil prices and liquefied natural gas (LNG) selling prices. Revenues from condensates and other oil products (about one third of total revenues) are expected to reflect the full decline of oil prices, while the decline in LNG revenues (two-thirds of total revenues) should be moderated by the contractual pricing formulas in long-term agreements.

Negative pricing pressures are accentuated by evolving developments in the LNG industry in the past year, such as weakening of demand in Asia, commissioning of new capacity (in Papua New Guinea in 2014 and Australia in 2015) and the emergence of new trading patterns such as shorter-term contracts.

However, these weaknesses and recent industry developments are mitigated by RasGas's long-term agreements for the majority of its LNG output and its strong competitive position within the global LNG market. Fitch considers that the company's extremely low oil and LNG break-even prices lend it substantial financial flexibility to withstand market downturns and operational stresses.

Given the lack of detailed information on the terms of the LNG sale and purchase agreements, the Fitch base case assumes LNG prices at 0.1x to oil prices and does not give benefit to contractual floor prices. Under such conservative assumptions we forecast the debt service coverage ratio (DSCR) at 1x in 2019 (when the next bullet repayment is due) at an oil price of USD35/bbl (LNG price of USD3.5/Mmbtu).

Fitch's Midrange assessment of gross revenue risk for RasGas is due to its exposure to market price risk on its entire output. Some volume risk also exists in the form of spot market exposure on about 15% of output - around 5% of current LNG output is uncontracted and an additional 10% of LNG output will become uncontracted following the expiry of some long-term agreements in 2016/2017. RasGas is also exposed to the fairly weaker credit quality of some LNG offtakers, primarily Petronet LNG Ltd, which is the single largest LNG customer with 28% of total LNG deliveries in 2014.

Operating Risk: Midrange
The projects' safety records remained robust in 2014, highlighting sound operational procedures. The LNG trains' technical performance was positive, as demonstrated by high utilisation and reliability factors and stable production levels.

LNG sales volumes for both 2014 and 2013 were 29.2 million tonnes, and condensates' sales volumes were 63.9 million barrels compared with 64.5 million barrels in 2013. RasGas intends to maintain full production capacity despite current lower prices. Operation and maintenance expenses in 2014 were largely in line with budget.

The company's positive operating track record, its five LNG train configuration and its ability to withstand major cost shocks support a Midrange assessment for operating risk. This is despite technology and operating costs risk factors being at the higher end of the spectrum within Fitch's infrastructure and project finance rating universe.

Supply Risk: Stronger
No updated reserve audit reports are available; however, RasGas confirms that the pressure and quality of the gas at the wellhead remains in line with expectations and no material field development works are currently planned. Proved reserves were estimated as sufficient to meet the project's base case plateau production beyond the longest debt maturity.

Debt Structure: Midrange
The repayment of the largest bullet maturities (the Series F bonds and the corresponding sponsor co-lending tranches) in September 2014 was completed and was funded entirely of internally generated cashflows. The class G bond and associated sponsor co-lending tranche, due in 2019, are the only bullet maturities left and are also expected to be repaid without the need to access new funding sources. The remaining outstanding debt is in amortising form. The debt structure key rating driver is nevertheless assessed as Midrange because of the non-SPV nature of the issuer and the transaction's standard structural features.

Debt Service
The latest DSCR was 5.85x as of end-March 2015, which reflects the repayment of a large bullet in September 2014 (over USD2bn). Projected Fitch rating case metrics are largely unchanged compared with last year, as a conservative stress case oil price of USD55/bbl remains the same as per Fitch's oil price decks. Fitch rating case further incorporates a 15% stress to O&M costs and a 7% reduction in output volume.

Average DSCR over the remaining debt life is 8.1x with a minimum of 2.68x in 2019 when debt service commitment (approximately USD1.5bn) will be highest. High debt metrics even under conservative Fitch rating case assumptions indicate extremely strong resilience of the project.

RATING SENSITIVITIES

The occurrence of major operational issues, a marked deterioration in the overall credit quality of RasGas' LNG offtakers in conjunction with a material contraction in the spot LNG market may lead to negative rating action. A downgrade of the ratings could also be triggered by a material weakening of the financial profile of RasGas evidenced by a DSCR profile under the Fitch rating case of 3x. This could be a result, in our view, of oil prices that are persistently below Fitch's stress case oil price (USD55/bbl) combined with extremely weak global demand for LNG. Fitch currently views this unlikely.

The rating is constrained at the 'A' category by the project's single-site nature and technical
complexity.

SUMMARY OF CREDIT

RasGas (II) and RasGas 3 (RasGas) operate three 4.7mtpa LNG trains (Trains 3, 4 and 5 - RasGas 2) and two 7.8 mtpa LNG trains (Trains 6 & 7 - RasGas 3) at the Ras Laffan Industrial City of Qatar. RasGas' aggregated notional capacity is 29.7mtpa. The project derives about one third of its revenues from the sale of LNG and the rest from associated products (primarily condensates and LPG). LNG is mostly sold under 20 to 25 years "take-or-pay" sale and purchase agreements to a diversified pool of offtakers.

The rating actions are as follows:
Ras Gas (II) USD1,400m Series A senior secured bonds due 2020: affirmed at 'A+'; Outlook Stable
RasGas (3) USD850m Series B senior secured bonds due 2027: affirmed at 'A+'; Outlook Stable
RasGas (3) USD750m Series C senior secured bonds due 2016: affirmed at 'A+'; Outlook Stable
RasGas (3) USD800m Series D senior secured bonds due 2027: affirmed at 'A+'; Outlook Stable
RasGas (3) USD615m Series G senior secured bonds due 2019: affirmed at 'A+'; Outlook Stable