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UK-based BG Energy Holding’s (BG) strong liquified natural gas (LNG) position globally is driven by its stake in Point Fortin-based Atlantic, Fitch Ratings has said in its most recent (July 3) rating of the BG group. Under the headline “Strong LNG business” in its rating, Fitch showed that the equity production BG has from Atlantic was the single largest supply of LNG for the company to satisfy its customers’ demands.
“BG’s business profile benefits from the group’s strong positions in LNG production and marketing. In 2013 BG sold 10.9 million tonnes (mt) of LNG, sourced from BG’s equity production in Trinidad and Tobago (3.4 mt) and Egypt (1.7 mt), as well as from independent suppliers,” Fitch said. While LNG sales may edge down in 2014 due to gas supply shortage in Egypt, Fitch expects higher production volumes in 2015 as the first train of the Australian QCLNG project starts up in the fourth quarter of 2014 (4Q14).
“In 2013, the LNG segment contributed 35 per cent to BG’s operating profit, and we believe it will remain an important source of cash flows for the group,” Fitch said. The rating agency said the BG group has no exposure to European refining, which favourably distinguishes it from other integrated oil and gas producers, as the industry is now plagued by regional imbalances and intense competition with overseas refineries. This has resulted in low refining margins and Fitch does not expect recovery in the short term.
In the rating done jointly by Fitch Ratings’ London and Moscow teams, Fitch revised BG Energy Holding’s outlook to “negative” from “stable” and affirmed its long-term Issuer Default Rating (IDR) at “A-.” Fitch slapped a negative outlook on the BG group because of “completion risks associated with BG’s new upstream projects, challenges that the company is facing in Egypt, and the potential that funds from operations (FFO) adjusted net leverage may stay above 2.5x in the medium term if there are any delays to project start-ups.”
Fitch said it views the group’s credit metrics as stretched for the current ratings because of BG’s ambitious investments coinciding with declining production, despite a series of asset disposals intended to strengthen the group’s balance sheet. Fitch currently projects 2014 FFO net leverage to exceed 2.5x, before gradually declining provided upstream projects are completed on schedule.
Sudden CEO resignation
Fitch analysts said they also “believe that BG’s unexpected CEO resignation in April 2014 gives rise to some uncertainty with regard to the implementation of BG’s strategy.” Fitch expects that BG’s business profile should improve with the start-up of its major projects in Australia and Brazil. The commencement of operations at the QCLNG facility in Australia and ramping-up of the Santos Basin project in Brazil should help to offset declining production in Egypt, the rating agency said.
“However, we do not expect material cash generation from new production in Australia and Brazil before 2015. Risk associated with the timing of this new cash flow stream is the main factor supporting the negative outlook,” Fitch said. Among its “key rating drivers” which is what other rating agencies call the “rationale” for assigning the rating they did, Fitch said “production challenges remain” for the BG group.
“In the past BG had suffered from a series of production target shortfalls due to several challenges, ranging from delays or shutdowns in the North Sea, political instability in Egypt and scaled-back drilling in the US due to low natural gas prices. The group’s 2014 production is likely to be at the lower end of the previously targeted 590,000-630,000 barrels per day (mboe/d) range, according to the group. We assume BG’s 2014 output at 590 mboe/d, down 7 per cent year-on-year, mainly due to falling output in Egypt,” Fitch said.
Though BG Energy demonstrated better production dynamics in 2009-2013 compared with most international majors, which have generally seen a production decline over the period, Fitch said it regards BG’s “recent operational performance as weak,” taking into account its significant upstream capital expenditure (capex) and ambitious targets. For example, Fitch said, in 2011 the group had expected that its 2015 output would exceed 1,000 mboe/d.
Fitch said it expects that “2015 will be a turning point for the group’s production profile, which is the main assumption supporting the ratings.”
No future asset sales expected
BG Energy, Fitch said, “continues to review its portfolio and new disposals may follow; however, the timing, scale and effect on production of such potential disposals are largely uncertain. In our base case forecast we assume no future asset sales, except for the agreed CATS deal.” The rating agency then discussed “volatile Egyptian production.” Egypt, Fitch said, used to account for 20 per cent of BG’s upstream production in 2012, but was just 10 per cent in the first quarter of 2014.
“This decline is a result of both lower production entitlement as Egypt redirects more volumes for domestic off take, and poor reservoir performance,” Fitch said. The latter may deteriorate further as the group has decided to limit its capex in the country until the investment climate improves, Fitch said. The BG group’s LNG sales fell by 10 per cent to 10.9 million tons per annum (mtpa) in 2013, reflecting lower supplies from Egypt, Fitch said.
BG is now considering an option to supply its LNG plant with gas from the offshore Leviathan field in Israel, and a preliminary agreement has been reached with the project’s partners, Fitch said. However, this possible solution is unlikely to deliver any short-term results, as the field development has not yet been sanctioned, and it may only reach the production stage in 2017 at best. If approved, the project would require BG to construct a new undersea pipeline, which would mean additional capex, Fitch said.
Adverse political developments in Egypt are having a negative impact on the country’s hydrocarbon exports, Fitch said, adding that it is “mindful of the impact disruptions are having on BG’s export commitments and cash generation.”
BG Energy itself has said that “the political deterioration in Egypt will negatively impact the group’s 2014 production profile and BG is currently reviewing its plans in the country.” Although the political risk is factored into BG’s ratings, Fitch said a worsening of this risk leading to even less production, or rising overdue receivables balance (US$700 million as at 31 March 2014) resulting in material negative working capital movements could still lead to a downgrade.
On the BG group’s reserves, Fitch chose the sub-heading “solid reserve base” to describe the state of reserves at the British company.
“We classify BG’s production scale and reserve base as ‘medium,’ according to Fitch’s methodology. BG’s 2013 production of 633 mboe/d is in between that of global majors, including (France’s) Total SA (AA/Negative; 1,546 mboe/d, excluding affiliates), (Italy’s) Eni SpA (A+/Negative; 1,503 mboe/d) and (US’) ConocoPhillips (A/Stable; 1,410mboe/d), and that of less diversified producers, like (US’) Marathon Oil Corporation (BBB+/Stable; 484mboe/d), (Spain’s) Repsol, S.A. (BBB/Positive; 333mboe/d) and (Austria’s) OMV AG (A-/Stable; 278mboe/d),” Fitch said.
The group’s proved reserves of 3,538 million barrels of oil equivalent “translate into a healthy reserve life of 15 years,” Fitch said, adding that “BG’s organic reserve replacement ratios have significantly exceeded 100 per cent over the past several years, which should support its long-term production profile.” This means it has been replacing reserves as fast as it has been tapping into them to meet sales demand.
On the group’s liquidity and debt structure, Fitch said it views BG’s liquidity position at March 31 (2014) as “strong and in line with the ‘F2’ rating, despite the negative free cash flow we expect in 2014.”
BG’s liquidity position comprised US$6.3 billion cash and US$5.2 billion of unused stand-by bank facilities expiring in 2016-2017. This amount more than covers BG’s short-term debt obligations of US$478 million. In addition the group has access to an unused commercial paper programme (US$6 billion) and an unused portion of euro medium term note programme (US$9 billion), according to Fitch which closely tracks corporate bonds.
Fitch said: “We rate BG’s US$2.1 billion 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 - December 2013). We allocate it 50/50 between debt and equity.”
Delays could cause downgrade
The rating agency added, however that “delays or setbacks to the Australian or Brazilian projects, which are key to significantly increasing the group’s output, will most likely lead to a downgrade.” In addition, BG is exposed to potential delays and cost overruns due to the large scale of the projects presently being implemented. These risks are reflected in the negative outlook, Fitch said.
The analysts said they now assume that in 2015 BG’s production will rebound to at least 675 mboe/d, and should grow further to at least 725 mboe/d in 2016 as production in Australia and Brazil ramps up. Fitch said it projects BG’s FFO adjusted net leverage could deteriorate to above 2.5x in 2014, up from 1.8x at end-2013, based on the agency’s conservative oil and gas price assumptions and falling production in 2014.
Fitch said it is working with a Brent price of US$96 per barrel of crude (bbl) in 2014, US$91/bbl in 2015, US$85/bbl in 2016 and US$80/bbl in the long term. The deterioration in leverage is also due, Fitch said, to its assumption that BG’s capex will remain high in 2014, before declining thereafter, and the uncertain timeframe for any additional asset sales. Fitch said: “Leverage should decline after 2014-2015, however, as higher output leads to greater cash flow generation and capex intensity falls.”
The negative impact on credit ratios from BG Energy’s ambitious capex programme is partially blunted by asset sales, Fitch said. “Most recently the group disposed of its 62.8 per cent stake of the Central Area Transmission System (CATS) located in the North Sea for US$954 million, including a deferred amount of US$66 million. In addition, in 2012-2013 BG released US$8.5 billion through assets sales, which helped to finance the group’s high capex and supported the ratings,” Fitch said.