OREANDA-NEWS. Fitch Ratings has affirmed Dolphin Energy Limited's (DEL) USD1,250m 5.888% secured bonds due 15 June 2019 and USD1,300m 5.5% secured bonds due 15 December 2021 at 'A+' with a Stable Outlook.

Fitch expects Dolphin to easily withstand the current weak oil price environment due to its high financial flexibility. The project's long-term gas supply contracts at very competitive fixed prices mitigate DEL's exposure to commodity prices. The affirmation further reflects continuing stable operational performance and strong gas demand in the UAE and Oman.

KEY RATING DRIVERS
Fitch assesses DEL's revenue risk as Stronger. The project's long-term fixed-price gas supply contracts currently account for around 46% of DEL's gross margin. This solid revenue base is a material stabilising factor that mitigates DEL's exposure to commodity prices from upstream revenues. DEL can withstand substantial oil price declines to as low as USD10/bbl under Fitch's base case assumptions.

The average condensates' price achieved by DEL in 1H15 was USD56.7/bbl - substantially lower than that achieved in previous years (USD100/bbl and above). However, Fitch's conservative rating case already factored in stressed oil prices (as per Fitch's Oil and Gas price deck assumptions) of USD55-USD57/bbl, and we maintain the same approach (see 'Revising Our Oil and Gas Price Assumptions' dated 8 June 2015 at www.fitchratings.com).

Fitch's analysis does not take into account the EBITDA contribution from the sale of volumes bought by DEL from Qatar Petroleum (third-party gas). These sales are viewed as an addition to DEL's business and in Fitch's opinion do not worsen the project's risk profile, as DEL essentially acts as an intermediary between QP and the offtakers of third-party gas.

The exposure to unrated counterparties is mitigated by DEL's competitive gas prices under long-term contracts, which provides offtakers with a strong incentive to perform. Prices under long-term contracts are very competitive and significantly lower than the cost of alternative supply (spot liquefied natural gas, diesel) or prices negotiated under short-term interruptible agreements, which approximate market spot prices. More generally, the growing natural gas deficit in UAE and Oman makes the project's reliable gas supply critical to the local economies and supports Fitch's view that DEL would be able to find alternative customers if required.

Fitch assesses DEL's Operational risk as Midrange, as the project's facilities are relatively complex but have been performing strongly. This is evidenced by DEL's ability to consistently meet the maximum production targets under the development and production sharing agreement (DPSA) since the start of operations in 2007. DEL's operating costs have been in line or below expectations so far. On-going technical issues have been resolved during scheduled maintenance shutdowns with no impact on production and availability. DEL has started several internally funded capital projects to improve operations, resulting in significantly higher budgeted capital costs in the next few years. This is not currently a risk due to its comfortable cash flow position, DEL's positive track record of cost management and the right to recover costs related to upstream operations under DPSA.

The addition of three additional compressors at Ras Laffan plant to increase the export pipeline's capacity to its 3.2 billion cubic feet per day maximum was completed in 1H15. The works were funded by the sponsors (no additional debt or use of internally generated cash).

Fitch assesses the project's exposure to supply risk as Stronger. In 2011, reserve consultants Netherland, Sewell & Associates Inc. estimated that 1P developed reserves (the level of production likely to be reached or exceeded with a 90% probability using existing infrastructure) were sufficient to cover the base case requirements until 2027. In 2014 DEL commenced the implementation of the reservoir management optimisation project (RMOP) which aims to optimise hydrocarbon recovery and extend the gas production plateau. The original business plan foresaw additional drilling works, but under the RMOP it is expected that these works will be carried out earlier in 2016-2018 and possibly on a larger scale. The majority of costs will be recoverable under DPSA.

Fitch assesses DEL's debt structure as Midrange, reflecting the complexity of the project's structure (upstream-midstream split, dual waterfall etc.) together with fairly strong structural features. Refinancing risk related to the 2021 bullet bond and associated shareholder debt is largely addressed by a sinking fund, which traps 100% of the refinancing requirement in Fitch's base case. In our rating case, the mechanism traps more than 80% of the bullet.

The latest reported annual debt service coverage ratio (DSCR) was a solid 4.69x as of June 2015. Fitch's base case projects average and minimum DSCRs at 4.2x and 2.66x until 2027, which is the horizon of Fitch's cash flow projections. Under a conservative rating case that uses oil price assumption of USD55/bbl, average and minimum DSCRs are 2.74x and 2.01x, respectively. This compares favourably with debt metric guidance in Fitch's Rating Criteria for Thermal Power Projects (the closest proxy to oil and gas projects), which specifies an average DSCR of 1.5-1.7x for partially contracted projects to be able to achieve 'BBB' category ratings.

RATING SENSITIVITIES
Fitch is unlikely to upgrade DEL's ratings given the single-site nature of the project's processing facilities in Ras Laffan and the single subsea export pipeline. DEL's ratings would come under downward pressure should the project experience major operating problems, if there is a severe reduction in the length of the production plateau, a blockade of the shipping route via Strait of Hormuz or a material deterioration in the credit quality of Abu Dhabi, the main market for DEL's natural gas, and Qatar. Fitch currently rates Qatar and Abu Dhabi at 'AA'.

SUMMARY OF CREDIT
DEL operates a large oil and gas project extracting gas from offshore fields in Qatar, processing it at Ras Laffan in Qatar and then exporting around 2 billion cubic feet a day of clean gas via a 364 km subsea pipeline to Abu Dhabi for onward sale in the UAE and Oman, mostly under long-term contracts. The project also produces a significant amount of condensate and liquefied petroleum gas which are by-products of the gas processing.