Doha: Moody’s Investors Service (Moody’s) yesterday affirmed the Aa3 long term issuer rating of Qatar Petroleum (QP) as well as QP’s aa3 baseline credit assessment (BCA). Moody’s has also assigned Aa3 ratings to QP’s contemplated senior unsecured bond issuances. The outlook on all ratings is stable.
“The affirmation of QP’s rating reflects the expectation that QP will maintain a very strong financial profile despite the sizeable and partially debt-funded capital spending program over the course of the next six years”, says Julien Haddad, a Vice President - Senior Analyst, and the local market analyst on QP. “The affirmation of the rating also reflects the expectation that QP will execute the North Field East Expansion (NFE) LNG project on time and in line with budget given the company’s track record in delivering mega projects”.
QP is contemplating to issue bonds in four tranches to partially fund its capital spending program for the NFE, the Golden Pass in Texas, US, and two petrochemical projects in Qatar and the US. According to QP, the company’s capital spending share in these projects and a portion of the North Field South Expansion (NFS) LNG project will be approximately $35bn, spread over the next five years. This assumes that QP will bring in partners for up to 30 percent of the NFE.
The total estimated investment for the NFE is $28.75bn and will increase Qatar’s total Liquified Natural Gas (LNG) output by 43 percent to 110 million metric tonnes per annum (mtpa) by 2025 from the current level of 77 mtpa. The project will require the construction of four new LNG trains as well as offshore gas production facilities and pipelines to the onshore liquefaction trains.
The expansion, once completed, in addition to the LNG production, will also produce 4,500 tonnes per day (tpd) of ethane, which will be partially used as a feedstock for a new petrochemical plant with a capacity of 2.08 million tons of ethylene per annum and due to start production by end of 2026.
Once completed, Moody’s expects that the NFE will strengthen QP’s business profile. This is because demand for LNG is likely to remain sustained over a longer period of time compared to oil given its approximately 30 percent lower CO2 emissions per unit of energy. The expansion will also strengthen the company’s already dominant market position in the gas, and particularly, LNG market.
Moody’s expects QP’s credit profile to remain strong over the investment period. This is because QP is entering its investment phase on the back of a very strong financial profile with a very low leverage (as measured by Moody’s adjusted debt to book capitalization) and very high interest coverage (as measured by Moody’s adjusted EBIT to interest expense) of 18.2 percent and 16.4x as of end of 2020, despite the sharp decrease in oil prices during the year. Those metrics are measured on a proportionately consolidated basis to account for QP’s main joint ventures. The rating agency expects leverage to peak at 20 percent-22 percent between 2023 and 2025 and to decrease afterwards as capital spending decreases and QP’s joint ventures repay their amortizing debt.
Interest coverage is expected to improve in 2021 to 22.9x on the back of higher oil and gas prices compared to 2020 and to decrease over the course of the next five years to levels around 18x as the debt builds up to fund QP’s capital spending. Moody’s also expects QP’s retained cash flow to net debt (as adjusted by Moody’s) to remain around 60 percent over the course of the next five years.
Those metrics assume a reduction of QP’s dividend payout ratio, which was close to 90-95 percent historically, in order to channel internally generated cash flows to fund capital spending. Those metrics assume an oil price at the mid-point range of Moody’s assumptions of $45-$65 per barrel.
Moody’s has rated the contemplated bond issuances Aa3, at the same level of QP’s issuer rating. Those bonds will be unsecured and will rank pari-passu with QP’s unsecured obligations.
QP’s rating outlook is stable, in line with the stable outlook on the sovereign rating of Qatar, reflecting the strong credit links with the Government of Qatar.
