(The following statement was released by the rating agency) Fitch Ratings-Sydney-June 01: Fitch Ratings-Sydney-01 June 2018: Fitch Ratings has affirmed Australia-based Woodside Petroleum Ltd's Long-Term Foreign-Currency Issuer Default Rating at 'BBB+' with a Stable Outlook. The agency has also affirmed the senior unsecured rating of subsidiary, Woodside Finance Ltd., at 'BBB+'. The affirmations reflect Fitch's view that the company's risk profile is well-placed for its 'BBB+' rating, with lower leverage due to improving cash flow and the March 2018 equity raise. The company's risk profile, capital and financial policies help mitigate price volatility, however, limited diversification and small size limit the company to the 'BBB' category.
KEY RATING DRIVERS Strengthening Metrics: Fitch believes the measures taken by the company, including operating cost cuts, higher production, operational performance improvements, lower dividends and dividend reinstatement plans, have resulted in a strong credit profile. Woodside has also improved its risk profile due to the decline in oil prices and Fitch expects increased rating headroom under its 'BBB+' rating over the next two to three years, with credit metrics likely to remain within the tolerance level for its rating. Strong Operating Performance: Woodside has continued to improve its operational performance, with a 9% yoy fall in unit production costs during 2017, excluding its Wheatstone liquefied natural gas (LNG) project. Production volume for 2017 was lower due to a decline in Woodside's equity share in its domestic gas joint venture to 16.7%, from 50%, following the fulfilment of its production entitlement in May 2017. However, Fitch forecasts growth to resume, with annual production of over 100 million barrels of oil equivalent (boe) by 2020, driven by operating and new projects. Most of this growth is likely to come from its equity in Wheatstone and the Greater Enfield oilfield project.
Equity Raising, Higher Capex: Woodside completed a AUD2.5 billion equity raising in 1Q18, with the money to be used towards its Australian Scarborough and Senegalese SNE-Phase 1 projects. Fitch estimates that on a pro rata basis and including the AUD444 million Scarborough acquisition cost, Woodside's leverage would have been 1.9x on an FFO adjusted net leverage basis in 4Q18. We expected leverage to remain flat over the next two to three years, as improved cash flow will cover capex and dividends, including the initial cost of the SNE-Phase 1 project. However, leverage is likely to rise from 2021, as Woodside begins to invest in Scarborough and, potentially, the Browse LNG project. Woodside forecasts capex of around AUD8.5 billion for Scarborough and AUD6.0 billion for Browse. Cost timing and the maintenance of the company's dividend pay-out ratio may also increase leverage, but Fitch expects leverage to remain within the agency's tolerance level for the current rating. Fitch believes that over the long-run, Woodside may cut its equity holdings in the projects or lower its exploration capex to keep leverage within management's target of 10%-30% gearing (net debt/net debt + equity). LNG Oil-Linked Revenue: Woodside's oil-linked LNG revenue fell in 2017 due to lower total production, but the fall was partially offset by a 9% rise in the realised price to USD44/boe. Higher oil prices in 2017 positively contributed to the lagged effect of oil prices on LNG prices, which is typical under Asian LNG contracts. Woodside's average realised price may continue rising in the near-term due to the higher oil price and the lagged effect of oil-linked pricing on existing LNG contracts. There is medium-term upside for LNG price-linked revenue growth due to a supply-gap opening up from the early 2020s. Oil-Price Provides Upside: Fitch's rating case includes a price deck forecast of USD57.5/ per barrel over the next two to three years. Prices have remained above USD70.0 over the previous few months, which may be sustained over 2018 to provide an upside to our base case. Woodside's rating reflects its ability to adjust to lower prices over the long-term along with its financial flexibility, including high capex flexibility given its low committed capex levels. DERIVATION SUMMARY Woodside's rating is supported by its large share of LNG-linked revenue, with a significant portion of revenue contracted with some price protection. This provides some stability in financial performance compared with other independent 'BBB' category upstream peers, such as Devon Energy Corporation (NYSE:DVN) (BBB+/Stable), Anadarko Petroleum Corp (NYSE:APC). (BBB/Stable) and Apache Corporation (NYSE:APA) (BBB/Positive), which have greater exposure to oil price volatility. Cost cutting measures taken over the previous few years, along with capex flexibility - as reflected in lower committed capex- allow Woodside to maintain stable leverage during periods of lower oil prices, while remaining well positioned to benefit from higher LNG demand across Asia in the medium term. However, Woodside's production and reserve profile, with limited diversification, is below the 'BBB+' upstream peer average, limiting its rating despite its adequate reserve life. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - production volume within company guidance for 2018 of 85 million boe to 90 million boe - production volume increasing by about 20% by 2020, reflecting the contribution from Wheatstone and Greater Enfield - Flat oil price of 57.5USD/barrel based on Fitch's Brent price-deck, LNG prices rising by 2% per annum over 2018-2019 then flat thereafter - Field or lifting costs increasing to USD6.3/boe by 2021, driven by higher oil production and associated costs - cash flow capex and exploration expenditure of about USD1.6 billion in 2018, excluding Scarborough acquisition costs, increasing to about USD2.7 billion per annum post the Scarborough final investment decision in 2021 - dividend pay-out ratio maintained at 80% RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action -
Fitch considers an upgrade to be unlikely over the medium-term due to significant uncommitted growth capex in the pipeline. Companies rated by Fitch in the 'A' category are generally larger and more diversified, with a more conservative financial profile to counter commodity price volatility exposure. Developments that May, Individually or Collectively, Lead to Negative Rating Action -
Forecast adjusted net leverage rising above 2.5x and forecast FFO fixed-charge coverage falling below 5.0x, both for a sustained period -A commitment by Woodside to any significant debt-funded investments, including acquisitions LIQUIDITY Adequate Liquidity: Woodside had USD2.9 billion of cash and undrawn facilities at end-2017 (2016: USD2.7 billion). The company remains well-funded to meet existing commitments and liquidity remains substantial. Woodside also has ready access to both debt markets and bank funding. Its debt maturity profile remains comfortable, with an average term to maturity of about five years and negligible maturities in 2018. Contact: Primary Analyst James Hollamby Associate Director +61 2 8256 0347 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney, NSW 2000 Secondary Analyst Leo Park Associate Director +61 2 8256 0323 Committee Chairperson Sajal Kishore Senior Director +61 2 8256 0321 For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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