BG lowered its production growth projection to about three per cent for 2012, and 0 per cent for 2013 due to "operational and technical difficulties," but anticipates production to grow again in 2014, Fitch Ratings said in a "BG Energy Holdings Peer Study" e-mailed to the Business Guardian on April 23.
"As a result, 2013 production volumes will be broadly in line with the current production trend shown in the chart above. More problematic to Fitch is the fact that this downward revision could lead to delays in achieving the company's long-term production expansion plans of six to eight per cent average compound annual growth rate (CAGR) from 2005 to 2020.
The company anticipates output rising starting in 2014 as the Australian liquefied natural gas (LNG) project begins to come onstream and output from Brazil FPSO 2 and 3 ramps up," Fitch said.
FPSO is the acronym for a floating, production, storage and offloading ship now used in offshore oil and gas exploration. "Overall market expectations are for upstream growth over the 2012 to 2015 period of 8 to 10 per cent, with the bulk of the increase materialising in 2015," Fitch said.
Fitch views BG's reliance on such a large output increase in one year as being more risky to the company's business profile versus the steady output increases achieved by the Occidental Petroleum Corporation (OXY), which is one of the two peers BG was studied against. The other peer was Apache Oil Company (APA). "Such steady operational performance as OXY's is more in line with our view of a mid-single A rated entity," Fitch said.
Fitch affirmed a negative rating watch for BG on April 25.
"The negative rating watch for BG reflects a substantial reduction in BG's planned oil and gas production growth for 2013 to 2015 that undermines the company's track record of meeting production targets. This track record is important to Fitch's decision to tolerate higher credit metrics in the next two to three years than are usually comfortable for an A rating for this type of company," Fitch said.
Key projects
BG and OXY are spending heavily on key projects to increase output, Fitch said. The cumulative capital expenditure (capex) of both companies is up 200 per cent over a five-year period, but has levelled off lately, Fitch said. "This absolute spending is high for both companies compared to peers and reflects each company?s investment ramp-up strategy," Fitch said.
"For example, BG is still spending heavily on key projects such as expensive Australian LNG and offshore Brazil. OXY will now reduce overall capex by approximately 6 per cent in 2013 as domestic projects are completed, whilst BG forecasts a 15 per cent increase in overall 2013 capex, (69 per cent increase in Brazil capex and ten per cent increase in Australian LNG capex)," the Fitch study said. Some 46 per cent of BG's 2013 capex is for its Australian LNG project, Fitch said.
Fitch anticipates future capex pressure may be significant at Apache given the company's spate of recent acquisitions and its two pending LNG projects (Wheatstone and Kitimat) despite the fact that Apache's cumulative capex has been less aggressive than BG's or OXY's.
These projects may also create interim funding pressures for Apache given the multi-year lag between initial investment and ultimate cash flows, but Fitch believes they will eventually lower Apache's overall portfolio volatility.
More concerning to Fitch is any mismatch between spending and output. Fitch said in November 2012 that "we will need to assess the impact of the recent downward revision of BG's output growth on the company's capital expenditure programme and production strategy over the next two to five years to resolve the negative rating watch.
As the company's credit metrics are high for its current rating, continuous ambitious investments coupled with failure to deliver on set production targets would probably result in a downgrade."
Fitch added, "Furthermore, if BG fails to reduce leverage after 2014, when the LNG project in Australia comes on stream and with increasing contribution from production in Brazil, this would put further pressure on the company's ratings."
