Fitch Affirms Woodside Petroleum at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-15 June 2020: Fitch Ratings has affirmed Australia-based Woodside Petroleum Ltd's Long-Term Foreign-Currency Issuer Default Rating at 'BBB+' with a Stable Outlook. The foreign-currency senior unsecured rating of its subsidiary, Woodside Finance Ltd., has also been affirmed at 'BBB+'. The affirmation reflects Woodside's strong balance sheet and limited leverage, which should allow the company to meet the challenges from the coronavirus and the low oil price environment. Woodside's rating also benefits from measures taken by management including reducing expenditure and delaying final investment decisions (FID) on its major expansion projects. We expect Woodside's FFO net leverage to remain comfortably below 2.0x in 2020 and improve further in 2021. Fitch will factor in the expansion projects once there is greater clarity over their progress. Key Rating Drivers COVID-19 Impact Manageable: Woodside's strong balance sheet is the result of the preparation for its major expansion projects, which allows the company to manage the impact of the pandemic and lower oil prices on its business. Management is also mitigating the pandemic's impact by reducing planned 2020 expenditure by 50%, including a 60% cut to its guidance on investment expenditure amid the delay in the FIDs of its major expansion projects. Fitch expects FFO net leverage to peak at 1.8x in 2020 (2019: 0.5x), below our downgrade threshold of 2.2x, before falling thereafter. Oil-Linked LNG Revenue: Fitch expects a material reduction in Woodside's revenue in 2020 as lower oil prices will have a negative impact due to the oil-price linkage typically incorporated under Asian liquefied natural gas (LNG) contracts. Woodside's revenue, however, benefits from its large exposure to LNG compared with international peers, with the majority of LNG sold on long-term contracts, which should support sales volume, with only around 15%-20% of Woodside's cargo exposed to the spot market. Better Operating Performance: Fitch forecasts Woodside's production will rise to 95mmboe in 2020 from 90mmboe in 2019, below management's guidance of 97-104mmboe. Production volume in 2020 will benefit from the full-year contribution of its offshore Australia Greater Enfield project after the return of the Ngujima-Yin floating production and storage offloading vessel in 2019 after a refit. We expect annual production to rise further to average 99mmboe over 2021-2023 as the impact of the coronavirus on demand eases. Expansion Unlikely in Near Term: Fitch believes Woodside's major LNG expansion projects, Scarborough and Browse, are unlikely to proceed in the near term with management delaying the FID on Scarborough to 2021 from 2H20, and no firm date for Browse. Of the two projects, Fitch believes Scarborough is more likely to reach a FID, although we have not included either of the projects in our base case due to the uncertainty over reaching a decision and the options available in terms of final project composition. We expect the Scarborough and Browse projects to require substantial capital of around USD10 billion and USD6 billion, respectively, and should an FID be reached on either project, it would place pressure on Woodside's rating, despite measures taken by the company to date, including its equity raising in 2018. If completed, the projects would materially increase Woodside's annual production, improving cash flows and organic deleveraging capacity, although this is unlikely to be realised before 2024. Sale of Equity in Projects: Management indicated it may reduce equity holdings in both its Scarborough and Pluto Train 2 projects, which would reduce Woodside's share of capex although any sale in the near term is unlikely in light of the current low oil prices. Fitch believes there are additional measures available to management, such as a reduction in the dividend payout or another equity raising, which could also help to contain leverage. Oil-Price Volatility Poses Risks: Woodside's rating reflects its ability to adjust to lower prices over the long term along with its financial flexibility including a flexible dividend target of 50%-80% of net profit. However, its capex flexibility would be diminished if it reaches the FIDs on the upcoming expansion projects. Fitch's rating case includes an oil price deck forecast of USD35.0/per barrel over 2020, increasing to USD55/per barrel by 2023. Oil-price volatility could, however, provide either risks or upside to Fitch's base case. 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 for some stability in financial performance compared with other independent 'BBB' category upstream peers such as Devon Energy Corporation (NYSE:DVN) (BBB/Stable), Concho Resources (NYSE:CXO) Inc. (BBB/Stable) and Pioneer Natural Resources (NYSE:PXD) Co. (BBB/Stable), which have greater exposure to volatility in oil prices. However, Woodside's production and reserve profile, with limited diversification, is below average compared with that of its 'BBB+' category upstream peers, and limits the company's rating, although its reserve life remains adequate. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - Fitch oil price deck: USD35/barrel in 2020, USD45/barrel in 2021, USD53/barrel in 2022 and USD55/barrel thereafter - 2020 production of 95mmboe increasing to around 100mmboe thereafter - Dividend payout ratio of 80% of underlying net profit after tax - Capex of USD1.8 billion in 2020, USD2 billion/annum thereafter - Scarborough or Browse expansion projects not included in base rating case. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: Fitch considers an upgrade unlikely over the medium term due to the significant uncommitted expansion capex in the pipeline. The companies rated by Fitch in the 'A' rating categories are generally larger and more diversified and with a more conservative financial profile to counter any exposure to commodity price volatility Factors that could, individually or collectively, lead to negative rating action/downgrade: - Forecast net leverage rising above 2.2x on a sustained basis. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Substantial Liquidity: Woodside had USD6.9 billion of cash and undrawn facilities at end-2019 (2018: USD3.9 billion), including USD4.1 billion in cash and cash equivalents. Liquidity remains substantial and Woodside has ready access to debt markets and bank funding. Woodside's debt-maturity profile remains comfortable, with an average term to maturity of about five years and negligible maturities in 2020. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Woodside Petroleum Ltd; Long Term Issuer Default Rating; Affirmed; BBB+; RO:Sta Woodside Finance Ltd. ----senior unsecured; Long Term Rating; Affirmed; BBB+ Contacts: Primary Rating Analyst James Hollamby, Associate Director +61 2 8256 0347 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Committee Chairperson Muralidharan Ramakrishnan, Senior Director +65 6796 7236 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com The following issuer(s) did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure: Woodside Petroleum Ltd Woodside Finance Ltd. Applicable Criteria Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10120170) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10090792) Country-Specific Treatment of Recovery Ratings Rating Criteria (pub. 27 Feb 2020) (https://www.fitchratings.com/site/re/10111386) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1 (https://www.fitchratings.com/site/re/973270)) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10126111) Solicitation Status (https://www.fitchratings.com/site/pr/10126111#solicitation) With respect to this RAC, if the lead analyst is based in an EU-registered entity, the issuer(s) will be displayed below in the following colour when the ratings provided are unsolicited and the issuer(s) did not participate in the rating process, or provide additional information beyond the issuer's available public disclosure. Non-Participating Unsolicited Issuers Woodside Petroleum Ltd Endorsement Status (https://www.fitchratings.com/site/pr/10126111#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10126111#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT (https://www.fitchratings.com/rating-definitions-document) DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY (https://www.fitchratings.com/site/regulatory). FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.