Fitch Ratings has affirmed Dolphin Energy Limited’s (DEL) USD1,250m 5.88% secured bonds due 15 June 2019 and USD1,300m 5.5% secured bonds due 15 December 2021 at ‘A+’. The Outlooks are Stable.
The ratings of DEL reflect its resilience to the current low oil price environment, a strong competitive position in the markets it serves, longer estimated reserve life than its debt maturity and a positive track record of operational performance of eight years. DEL’s overall debt profile remains robust with an average debt service coverage ratio (DSCR) over 2016-2030 of 3.36x and a minimum of 2.15x (2019) under Fitch’s rating case, which assumes a long-term oil price of USD40/bbl.
DEL operates a large oil and gas project extracting gas from offshore fields in Qatar.
KEY RATING DRIVERS
Revenue Risk – Stronger
We assess DEL as Stronger in respect of revenue risk despite partial exposure to commodity oil and gas prices. The project’s long-term fixed-price gas supply contracts account for over 50% of DEL’s gross margin and substantially mitigate DEL’s exposure to commodity prices.
Within the upstream business, DEL can withstand significant oil price declines and is able to break-even at an oil price of USD1.8bbl under Fitch’s base case. DEL should be able to withstand the current low oil price environment due to its high financial flexibility. Fitch’s rating case factors in stressed oil price levels (see ‘Oil and Gas Price Assumptions’ dated July 2016), which have been further adjusted down to a long-term USD40/bbl, from USD55/bbl previously.
DEL’s exposure to market gas prices under short-term interruptible gas sales is sizeable in revenue terms (20% in 2015, 12% in 1H16 of gas revenues excluding third-party gas sales). Our projection of USD6/Mmbtu for interruptible gas sales is still appropriate despite a substantial reduction in global gas prices in 2016. Our unchanged assumption is supported by historical interruptible gas prices achieved by DEL, including in 1H16, and the market advisor’s projection of the cost of alternative supply (importing liquefied natural gas to UAE or diesel).
The exposure to unrated long-term gas offtakers Abu Dhabi Water and Electricity Company (ADWEC), Dubai Supply Authority (DUSUP) and Oman Oil Company is mitigated by DEL’s competitive gas prices under long-term contracts. These are significantly lower than the cost of alternative supply or prices negotiated under short-term interruptible agreements, which approximate market spot prices.
Supply Risk – Stronger
DEL’s exposure to supply risk is assessed as Stronger. The reserve consultant NSAI provided an updated reserve study in 2015 showing that 1P developed reserves (the level of production which is likely to be reached or exceeded with a 90% probability) are sufficient to cover base case requirements until 2026.
DEL is progressing with the implementation of the Reservoir Management and Optimisation Project (RMOP) aimed at achieving homogenous reservoir depletion, particularly of liquids, and extending the production plateau. NSAI estimated that RMOP will extend DEL’s production plateau to April 2034 in case of partial implementation and to October 2039 in case of full implementation. The Stronger assessment of supply risk is supported by an estimated reserve life extending beyond debt maturity and NSAI’s view that projects such as RMOP are common in the oil and gas industry.
Operating Risk – Midrange
Fitch assesses DEL’s operational risk as Midrange. The project’s facilities are relatively complex but have been performing well over eight years. On-going technical issues are resolved during scheduled maintenance shutdowns with no significant impact on production and availability, and DEL has consistently met the maximum production targets under the Development and Production Sharing Agreement (DPSA), supporting the positive operational track record of the asset.
Debt Structure – Midrange
The midrange assessment reflects the complexity of the project’s structure (upstream-midstream split, dual waterfall etc.) together with the project’s fairly strong structural features. Refinancing risk related to the 2021 bullet bond and associated shareholder debt is addressed by a sinking fund and the mechanism should trap 100% of the bullet requirement, even under Fitch rating case.
Despite the sinking fund feature, the financial projections assume that the 2021 bond will be re-financed with amortising debt maturing in 2030. With the addition of USD863m of bank debt in late 2015, the maturity of the debt extends to 2030 and the tail remaining until the end of DPSA is 1.5 years. The proportion of debt exposed to floating unhedged interest rates is about 26%, and Fitch assumes a stressed LIBOR rate in its projections.
Financial Profile
Under the revised projections Fitch’s base case average DSCR over 2016-2030 is 4.02x with a minimum of 2.44x. Under Fitch rating case, which incorporates long-term stress case oil price of USD40/bbl, average DSCR is 3.36x with a minimum of 2.15x (2019). Debt metrics are 20-30bps lower than last year, due to our revised oil price projections. However in our view, DEL’s financial profile remains strong, which is supported by low forecast gross debt/cash flows available for debt service of 3x at end-2016.
DEL’s capex, such as the RMOP and Industrial Water Management Project (IWMP), is not subtracted from cash flows available for debt service when calculating debt metrics in line with the project’s documentation, as debt service ranks senior to discretionary capex in the cash waterfall. However, even if this capex was entirely funded from operational cash flows as it occurs, it would not jeopardise debt service, demonstrating the strength of the cash flow profile. In addition, capex related to upstream operations is recoverable through upstream revenues over five years as per the provisions of the DPSA.
Peers
Peers in this rating category and with similar revenue structure are limited. RasGas is the most comparable peer transaction, with an underlying rating at the same level at ‘A+’. RasGas derives its revenues from the sale of LNG and by-products and its revenues are fully exposed to commodity prices versus DEL whose revenue stream is partially contracted. RasGas’s revenue risk is assessed as Midrange. RasGas’s debt metrics, however, are stronger under the same oil price assumptions, with the average DSCR over the remaining debt life of 5.9x.
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 prolonged 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 ‘AA’.
The ratings could also come under pressure in case of deterioration of average DSCR to 2030 under Fitch’s rating case to levels close to or below 2.4x
PERFOMANCE UPDATE
DEL’s operational performance in 2015 and 2016 was stable, with gas production at the maximum allowable annual level of 730 bcf under DPSA. Condensates’ production in 2015 was at the same level as in 2014 at around 33million barrels.
DEL is affected by lower oil prices with average achieved condensates’ price of USD52/bbl in 2015 and USD40/bbl in 1H16. However, operating costs have been under control and financial performance is generally in line with expectations. Last year’s reported annual DSCR was 3.63x and the latest June 2016 reported annual DSCR was 2.81x (excluding the impact of third party gas sales and capex) against previous Fitch base case DSCR of 2.91x for the same period.
DEL is on track with the implementation of RMOP and IWMP. The first phase of the drilling works under RMOP is expected to be completed in Q117.
SUMMARY OF CREDIT
DEL operates a large oil and gas project extracting gas from offshore fields in Qatar, processes gas at Ras Laffan in Qatar and then exports 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 gas processing.