Fitch Ratings-London-April 11: 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) senior secured bonds at 'AA-' with Stable Outlook.
The rating is based on our Government-Related Entities (GREs) Rating Criteria under which we equalise the company's rating with that of the State of Qatar (AA-/Stable), RasGas (II)'s and (3)'s indirect majority shareholder. The rating reflects the status of RasGas (II) and (3) as an integral part of Qatar's oil and gas industry, the strong ownership and control links between RasGas (II) and (3) and the State of Qatar and our expectation that state support would be forthcoming if needed. We also deem the financial implication of a default of RasGas (II) and (3) for the Qatari state as severe while the socio-political implications as moderate. We continue to assess the company's standalone credit profile at 'A+'.
KEY RATING DRIVERS
Status, Ownership and Control - Moderate
Rasgas (II) and (3) are incorporated under ordinary commercial law in Qatar. They do not have special legal status that may involve an automatic transfer of liabilities to the government in case of dissolution, but Qatar Petroleum's 70% ownership of RasGas (II) and (3) establishes a close relationship with the state. Qatar Petroleum is itself 100% government-owned and is responsible for all oil and gas industry processes in Qatar and abroad. A high degree of management control by Qatar Petroleum is exercised through the board composition of RasGas (II) and (3).
Support Track Record and Expectations - Strong
The company's financial position is very healthy and has not warranted any form of state support to date. RasGas (II) and (3) are structured as a ring-fenced project without explicit sovereign guarantees. We expect state support to RasGas (II) and (3), in case of need, to be provided through Qatar Petroleum rather than by directly servicing the entity's debt.
Socio-Political Implications of Default - Strong
RasGas (II) and (3) are a vital component of Qatar's hydrocarbon sector, on which the country is heavily dependent. RasGas (II) and (3) contribute about 40% to Qatar's LNG output. Hydrocarbons are the cornerstone of Qatar's economy, with oil and gas extraction averaging 50% of GDP and 80% of external receipts and government revenue. RasGas (II) and (3) would likely continue operations even if it fails to meet its debt service as it requires no additional funding above maintenance expenditure.
Financial Implications of GRE Default - Strong
We deem a default of RasGas (II) and (3) would have a significant impact on the availability and cost of foreign financing options for Qatar.
Standalone Rating 'A+'
Fitch assesses RasGas (II)'s and (3)'s standalone credit quality at 'A+' due to the Company's exceptional financial flexibility, demonstrated by a minimum Fitch rating case (FRC) debt service cover ratio (DSCR) of 3.42x in 2019, before increasing to above 7x, and also to the company's strong competitive position within the global LNG industry to withstand major market downturns.
Low-Cost Production Underpins Volumes: Revenue Risk - Midrange
RasGas (II) and (3) are exposed to market price risk on its entire output as its contracts are linked to oil prices. However, the Company's extremely low oil and LNG break-even prices lend it substantial financial flexibility to withstand market downturns and operational stresses. Long-term agreements are in place for the majority of LNG output. Historically, RasGas (II) and (3) have sold up to 25% of volumes on a spot basis, diverting LNG cargoes.
RasGas (II) and (3) are exposed to the weaker credit quality of some LNG offtakers, namely Petronet LNG Ltd and Bangladesh Oil, Gas and Mineral Corp (Petrobangla), which received its first LNG cargoes in 2018. The two off-takers represent a share of up to 30% of contracted volumes. The contracts are backed by letters of credit from banks with high credit ratings, which mitigate risks to the financial standing of the counterparties. We further believe that the company's strong competitive position within the global LNG market should allow the company to find alternative off-takers, if needed.
Long Operating Track Record and Operational Flexibility: Operation Risk - Midrange
The company's positive operating track record, five LNG train configuration and ability to withstand major cost shocks mitigate technology and operating cost risks.
Sufficient Resources: Supply Risk - Stronger
RasGas (II) and (3) extract gas from the offshore North field, the largest producing non-associated gas field in the world. The initial reserve study by NSAI estimated proved reserves to be sufficient to meet the company's base case plateau production beyond the company's longest debt maturity in 2027. Fitch does not receive updated reserve studies but has not seen evidence to expect significant deviation from the initial reserve study.
Largely Amortising Debt: Debt Structure - Midrange
The class G bond and associated sponsor co-lending tranche, due in 2019, are the only bullet maturities left and are expected to be repaid without the need to access new funding sources. The remaining outstanding debt is in amortising form and matures in 2027 and RasGas (II) and (3) do not currently plan to issue any additional debt. The debt structure benefits from a combination of standard structural features, a fairly high lock-up ratio of 2x, a long tail of seven years, but lacks security over the project's assets or agreements due to local regulations.
Financial Profile
Fitch expects debt metrics to remain solid, helped by some cost savings resulting from the integration of RasGas Operating Company Limited (RasGas Opco) into Qatargas Operating Company Limited (Qatargas Opco). Under FRC, which assumes long-term stress case oil price of USD50/bbl as well as output and cost stresses, average DSCR over 2019-2023 is 10.5x with a minimum of 3.4x in 2019 when the class G bond bullet and associated sponsor co-lending tranche are repaid from operational cash flows. The FRC forecasts average DSCR over the whole remaining debt life until 2027 at 11x.
PEER GROUP
Nakilat Inc is a vessel operator servicing the Qatari LNG industry and its senior debt is rated 'A+'/Stable. Nakilat is also rated under the GRE criteria and the strength of the linkage with the State of Qatar is viewed as moderate to strong in line with RasGas (II) and (3). However, the incentive to support is assessed as moderate compared with our strong assessment for RasGas (II) and (3) as socio-economic and financial implications of a default are deemed less severe than a default of RasGas (II) and (3) given the role of the company in Qatar's LNG value chain. As a result RasGas (II) and (3)' rating is equalised with that of the sovereign while Nakilat is rated two notches below.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
-A downgrade of Qatar's sovereign rating.
-A reduction in implied support and commitment from the government, as well as importance to and ownership by Qatar, which would prompt a review of the ratings.
-Deterioration of the company's standalone credit quality significantly increasing leverage or sustained deterioration of the company's operational performance, which could result in a downgrade.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
-Revision of the Outlook on Qatar's sovereign rating to Positive or an upgrade of the sovereign rating.
CREDIT UPDATE
Performance Update
RasGas (II)'s and (3) 's technical performance is stable, as demonstrated by high utilisation and reliability factors above 97% and stable production levels close to 30 million tonnes per annum. RasGas (II)'s and (3)'s revenue increased to USD18.5 billion in 2018 from USD14 billion in 2017, driven by an increase of oil and LNG selling prices. LNG spot sales made up around 17% of total revenue in 2018. Debt metrics remain strong with the DSCR at 10.5x in 2018, well above Fitch's base case (FBC) expectation, reflecting stable sales and a recovery in oil prices.
The operational integration of RasGas Opco with Qatargas Opco is completed resulting in operating efficiencies, in particular, in the support functions and by pooling vessels and sharing deliveries.
Qatar Petroleum plans to build additional LNG trains at Ras Laffan Industrial City, taking the total liquefaction capacity to 110 mtpa from 2024, when all the trains are expected to be completed, from approximately 77 mtpa currently. Gas from the North Field will supply feedstock for the expanded capacity. We view this as credit-neutral to RasGas (II) and (3) as these facilities will be outside the project perimeter, the shared resources are sufficient to meet the increased liquefaction capacity and RasGas (II) and (3) debt will largely be repaid at the point of completion of the new LNG trains.
Fitch Cases
Under FBC we apply oil price projections at USD65/bbl in 2019, and USD57.6/bbl in 2022 based on Fitch's oil price deck, a LNG price to oil conversion factor of 0.11x and inflation of 2%. Sales volumes and operating costs are based on the company budget with a stress of 2% and 10% respectively. The FBC results in an average DSCR of 14.3x between 2019 and 2023 and 14.4x over the full debt term. The minimum DSCR of 4.9x occurs in 2019 when a large bullet payment is due.
Under FRC, Fitch's stress case oil price assumptions are used instead with USD50/bbl in 2019 and USD45/bbl in 2020, USD50/bbl in 2022 and USD47.5 from 2021. The LNG price to oil conversion factor is 0.12x and inflation assumptions mirror the FBC. Sales volumes are stressed by 9% compared with the company budget and operating costs by 15%, resulting in forecast average DSCR of 11x over the whole remaining debt life until 2027. A minimum DSCR of 3.4x occurs in 2019.
Asset Description
RasGas (II) and (3) are Qatari LNG liquefaction companies engaged in the upstream production of natural gas, gas treatment and liquefaction, and the export of natural gas in liquid form. RasGas (II) and (3) operate three 4.7 mtpa LNG trains (Trains 3, 4 and 5 - RasGas 2) and two 7.8 mtpa LNG trains (Trains 6 & 7 - RasGas 3) at the Ras Laffan Industrial City of Qatar. RasGas (II)'s and (3)'s aggregated notional capacity is 29.7 mtpa. The project derives over 70% of its revenue from the sale of LNG and the rest from associated products (primarily condensates and LPG). LNG is mostly sold under 20 to 25 years "take-or-pay" sale & purchase agreements to a diversified pool of off-takers.
Contact:
Primary Analyst
Christiane Kuti
Director
+44 20 3530 1396
Fitch Ratings Limited
30 North Colonade
London E14 5GN
Secondary Analyst
Antoine Pavageau
Analyst
+44 20 3530 1729
Committee Chairperson
Ian Dixon
Managing Director
+44 20 3530 1815
Media Relations: Athos Larkou, London, Tel: +44 20 3530 1549, Email: athos.larkou@thefitchgroup.com.
Additional information is available on
Applicable Criteria
Government-Related Entities Rating Criteria (pub. 29 Mar 2019)
Rating Criteria for Infrastructure and Project Finance (pub. 27 Jul 2018)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
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