Fitch Ratings has affirmed Ras Laffan Liquefied Natural Gas Company Limited (II)’s (RasGas (II)) and Ras Laffan Liquefied Natural Gas Company Limited (3)’s (RasGas (3)) (together, the company or RasGas) senior secured bonds at ‘A+’ with Stable Outlooks. The obligations of each issuer are guaranteed by the other entity. A full list of rating actions is available at the end of this comment.
Fitch considers RasGas’s key strength its exceptionally high financial flexibility. This is key in supporting the bonds’ ‘A+’ rating despite mostly Midrange individual key rating driver assessments. The Stable Outlook is supported by the company’s solid operating track record and competitive position within the strongly performing global liquefied natural gas (LNG) industry.
KEY RATING DRIVERS
Operational Performance Remains Sound – Operation Risk: Midrange
During 2013 the projects’ safety record remained at the top end of industry standards, highlighting sound operational procedures. The LNG trains’ technical performance was positive, as demonstrated by high utilisation and reliability factors and operating costs being marginally in excess of budget but within Fitch’s expectations. The company’s positive operating track record, its five LNG train configuration and its ability to withstand major cost shocks support a Midrange assessment for operation risk despite technology and operating costs risk factors at the higher end of the spectrum within Fitch’s infrastructure and project finance rating universe.
Continuing Strong Cash Generation – Gross Revenue Risk: Midrange
RasGas’ revenues for 2013 totaled USD27.6bn, well ahead of budget on the back of higher oil prices. Revenues for the year also exceeded the 2012 results (USD27.2bn) despite a 3% reduction in LNG sales volume. The positive performance in the context of fairly flat oil prices was due to the company’s ability to increase by some 10% year-on-year the average price achieved on LNG sales, indicating a pro-active management of marketing operations. Sales of condensate and LPG (accounting for around 30% of total revenues) exceeded budget but fell short of 2012 sales levels by some 6%. The reduction in these revenues is due to slightly lower volumes and crude prices.
Despite the project’s strong revenue generation, Fitch’s assessment of gross revenue risk for RasGas is weighed down by the company’s exposure to market price risk on its entire output. Some volume risk exists in the 15% of total LNG output that remains uncontracted and in its exposure to the fairly weaker credit quality LNG offtakers, primarily Petronet LNG Ltd (RasGas’s single largest LNG customer with some 27% of total LNG deliveries in 2013) and Edison (97% owned by Electricite de France (EDF A+/Stable), around 15% of 2013 LNG deliveries).
However, these weaknesses are mitigated by RasGas’s strong competitive position within the global LNG market. Fitch considers that the company’s extremely low oil and natural gas break-even prices (less than USD40/Bbl, or USD4Mmbtu) lend it substantial financial flexibility during market downturns.
Satisfactory Resource Availability – Supply Risk: Stronger
No updated reserve audit reports are available; however, RasGas confirms that the pressure and quality of the gas at the wellhead remains in line with expectations and no material field development works are currently planned. Proved reserves were estimated as sufficient to meet the project’s base case plateau production beyond the longest debt maturity.
2014 Bullet Repayment Already Funded – Debt Structure: Midrange
The repayment of the debt programme’s largest bullet maturities (the Series F bonds and the corresponding sponsor co-lending tranches, due September 2014) will be funded out of internally generated cash, a portion of which has been set aside for this repayment. The Class G Bond and associated sponsor co-lending tranche, due in 2019, are the only bullet maturities left and are also expected to be repaid without the need to access new funding sources. The remaining outstanding debt is in amortising form. The debt structure key rating driver is nevertheless assessed as Midrange because of the non-SPV nature of the issuer and the transaction’s standard structural features.
The strength of the project’s economics is underlined by a debt service coverage ratio (DSCR) of 19.76x for the 12 months ended 31 March 2014, when RasGas’s total debt service expense totaled around USD800m. Under the Fitch rating case, which reflects a long-term oil price assumption of USD55/bbl in conjunction with a 15% stress to O&M costs and a 7% reduction in output volume, the average DSCR over the remaining debt life is 8.89x, with a minimum of 2.85x in 2019, when debt service commitment (approximately USD1.5bn) is highest.
A downgrade of the ratings could be triggered by average oil prices of USD80/bbl or less for more than a year, as this may signal a drastic shift in market fundamentals compared with Fitch’s current base case expectations. A marked deterioration in the overall credit quality of RasGas’ LNG offtakers in conjunction with a material contraction in the spot LNG market or major operational issues may also trigger a rating downgrade.