Fitch Maintains BG Energy Holdings on Rating Watch Positive
OREANDA-NEWS. Fitch Ratings has maintained UK-based BG Energy Holdings Limited's (BG) 'A-' Long-term Issuer Default Rating (IDR) on Rating Watch Positive (RWP) on BG's expected acquisition by Royal Dutch Shell plc (Shell, AA/Rating Watch Negative). A full list of rating actions is below.
The RWP reflects our expectation that the proposed acquisition of BG by Shell will significantly strengthen BG's credit profile. BG's post-acquisition rating will depend on our assessment of legal, strategic and operational ties between Shell and BG, as well as on Shell's post-acquisition rating. It is likely that we may maintain a one-notch differential between Shell and BG's ratings after the acquisition, in absence of legal ties. The deal is expected to close in early 2016 and is subject to remaining regulatory clearances from authorities in Australia and China, as well as approvals from the shareholders of the two companies.
BG's standalone credit profile remains commensurate with the low 'A' rating category. Despite notable operational progress in Australia and Brazil and growing production, BG's standalone profile is under some pressure due to remaining completion risks, primary associated with ramping up operations in Brazil, and higher exposure to oil prices compared to integrated players with downstream operations.
KEY RATING DRIVERS
Deal with Shell Transformational
The proposed combination between Shell and BG, announced in April 2015, should significantly reduce credit risks for BG. As per Fitch's Parent And Subsidiary Rating Linkage methodology, we are likely to rate BG applying the top-down approach as Shell's credit profile is stronger than that of BG, even assuming a possible one-notch downgrade. We will assess strategic, operational and legal ties between Shell and BG once the deal is finalised, and it is likely that we will keep the one-notch differential between the two ratings in the absence of legal ties but strong operational and strategic ties.
Shell has already obtained the green light for the deal from Brazil and the EU, with approval from Australia and China still pending. In September, the Australian Competition and Consumer Commission expressed its concerns that the planned transaction could reduce gas supplies to domestic customers by diverting supplies to Asia. However, we believe that Shell will eventually be able to get the approval.
'A-' Standalone Profile
BG's standalone credit profile is commensurate with the low 'A' level and remains under some pressure in view of remaining completion risks, mainly in Brazil, and volatility in the oil market, as BG is more exposed to oil prices compared to integrated players with downstream operations. BG's leverage metrics will though remain moderate supported by realised disposals and flexible capex. We expect BG's net funds from operations (FFO) leverage to hover around 2.5x in 2015-17, in line with that of other 'A'-category rated European majors, such as BP plc (A/Positive; 2.5x) and Eni SpA (A/Stable; 2.4x), but higher than that of 'AA' rated peers, such as Shell (2.0x) and Total SA (AA-/Stable; 2.0x).
Rising Output Mitigates Weak Oil
BG's negative production trend has been reversed as its large projects in Australia and Brazil are brought on stream and ramping up. Its 9M15 upstream production averaged 686 thousand barrels per day (mbpd), +15% yoy. Overall, we expect BG's 2015 production to average 690mbpd (+14% yoy), in line with the company's 680-700mbpd guidance.
The increase in production and an improved product mix with additional oil, as well as still high exposure to natural gas have cushioned BG's revenue against lower oil. In 9M15 BG's exploration and production revenue was down 28% yoy, while Brent plummeted by 48% over the same period.
Business Profile De-Risking
BG's completion risks have significantly reduced as its two largest greenfield projects, QCLNG in Australia and the Santos Basin in Brazil, are brought on stream and ramping up. This strengthens BG's credit profile as now we have more clarity with regards to its medium-term production. However, some moderate completion risks remain, mainly in ramping up production in the offshore Santos basin, where BG has interest in three pre-salt blocks operated by Petroleo Brasileiro S.A. (Petrobras, BBB-/Negative). However, rising volumes and the timely addition of oil producing vessels (FPSOs) indicate that the corruption scandal around Petrobras and low oil prices have not affected the company's operations in the region, at least so far.
Lower Profits from LNG Trading
BG has a strong business profile in LNG production and marketing, which was solidified with the completion of QCLNG. In 9M15 the group moved 194 cargos, up 45% yoy. Despite higher volumes, BG's LNG Shipping & Marketing EBITDA went down by 44% yoy in 9M15 to USD1,184m, impacted by lower LNG sales prices. BG has guided the segment's full year 2015 EBITDA in the range of USD1.3bn-USD1.5bn, effectively halved from the 2014 level of USD2.7bn.
Capex Flexibility, Disposals Helpful
BG's disposal programme has helped BG to maintain adequate credit metrics while investing in new projects. BG's capital intensity should fall, which also strengthens its credit profile, especially assuming lower oil prices.
Even before oil prices collapsed, the company indicated that its capital intensity would fall as QCLNG would move to the production stage and the company would spend less on its base assets. The current guidance for 2015 is USD6.5bn, which is our rating case assumption. Further on, we project capex at around USD6.0bn-USD6.5bn, assuming no significant new projects other than ramping-up in Brazil and moderate industry deflation.
BG's credit profile has also benefited from disposals. In June 2015, BG announced the sale of its 543km pipeline network linking natural gas fields and the QCLNG plant for USD4.6bn. In total, the group's ongoing portfolio rationalisation programme has yielded USD15bn over 2012-2015.
Fitch's key assumptions within our rating case for the issuer include:
- Brent: USD55/bbl in 2015; USD55 in 2016; USD65 in 2017; USD70 in 2018; USD75 in the long term
- Upstream output: +14%yoy in 2015, +10% in 2016 and +5% in 2017 as production in the Santos basin and QCLNG ramps up
- Capex: USD6.5bn in 2015, USD6bn-6.5bn in 2016-17
- Dividends: USD1bn in 2015; USD800-900m in 2016-17.
Successful completion of the proposed takeover by Shell is likely to result in an upgrade.
On a standalone basis BG's rating trajectory would depend on the following:
- Upstream production exceeding 750mbpd, improved performance of the LNG Shipping & Marketing segment (EBITDA above USD2bn) and/or through-the-cycle FFO net adjusted leverage stabilised at 2x-2.5x could remove the negative pressure from BG's 'A-' standalone rating.
- Upstream production exceeding 800mbpd, further improvement in the performance of the LNG Shipping & Marketing segment and through the cycle FFO net adjusted leverage at below 2x could result in an upgrade of BG's standalone credit profile.
- Upstream production falling below 680mbpd, weak performance of the LNG Shipping & Marketing segment (EBITDA below USD1.5bn) and through-the-cycle FFO net adjusted leverage above 2.5x could result in a downgrade of BG's standalone credit profile.
We view BG's liquidity position at 30 September 2015 as strong and consistent with its 'F2' rating, despite the negative free cash flow we expect for 2015-16. The group's liquidity position is comprised of USD6.3bn in cash, USD7.3bn in committed undrawn credit facilities expiring in 2017-19 and USD1.7bn from a credit facility provided by an export credit agency. This more than covers BG's short-term borrowings of USD0.4bn. Additionally, the company has access to an unused commercial paper programme (USD6bn) and an unused portion of euro medium-term note programme (USD7bn).
We rate BG's USD2.1bn subordinated unsecured hybrid securities due 2072 two notches below the company's IDR, in line with Fitch's methodology (Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis - November 2014). We allocate it 50/50 between debt and equity.
FULL LIST OF RATING ACTIONS
BG Energy Holdings
Long-term IDR: 'A-' maintained on RWP
Short-term IDR: maintained on RWP
BG Energy Finance Inc.
Short-term debt rating: 'F2' maintained on RWP
BG Energy Capital plc
Senior unsecured rating: 'A-' maintained on RWP
Short-term debt rating: 'F2' maintained on RWP
Subordinated hybrid debt: 'BBB' maintained on RWP