The ratings agency Moody’s has affirmed the BAA1 rating of Australian LNG major Woodside Petroleum changing the rating outlook to stable from negative.
“The change in outlook to stable reflects our expectation that Woodside’s earnings and cash flow will remain at solid levels over the next for 12-18 months which, combined with lower net debt following the recently announced equity issuance, will lead to improved credit metrics for the rating level,” says Matthew Moore, a Moody’s vice president and senior credit officer.
In 2017, Woodside registered retained cash flow (RCF)/net debt of around 24 percent-25 percent, below Moody’s expectation of at least 35 percent for the BAA1 rating level. However, the company’s announcement that it will issue up to A$2.5 billion (US$2.0 billion) of equity, combined with Moody’s expectations of increasing production levels and stabilizing oil prices, should see this metric improve to around 35 percent-40 percent in 2018 and to even stronger levels in 2019. Pro forma for the equity issuance, RCF/net debt in 2017 would have been around 30 percent.
Woodside unveiled the equity raising as part of its full-year earnings announcement, in which it also outlined plans to acquire up to an additional 50 percent interest in the Scarborough gas field from Exxon Mobil for around $444 million, plus an additional $300 million contingent upon a final investment decision on the development of the resource.
The acquisition, if completed, would give Woodside greater control over the development of the resource, which could underpin an expansion of its Pluto LNG facilities in Western Australia.
The announcement of a sizable equity offering along with the announced acquisition and further details around potential increases in investment spending for major projects beyond 2018 demonstrates the company’s commitment to maintaining a conservative financial profile, Moody’s said. The stabilization of the outlook reflects Moody’s expectation that the company will continue to maintain financial policies in line with a strong investment-grade credit profile.
Woodside achieved solid operating results for 2017, with adjusted EBITDA increasing by around 3 percent from 2016 as higher realized prices and low unit costs more than offset lower production levels. Woodside’s free cash flow breakeven levels remained well below current prices at the equivalent of a Brent oil price of around $36 per barrel (bbl) in 2017.
Moody’s expects Woodside will continue to focus on cost and productivity improvements in order to sustain production costs near their current very low levels. This, combined with production increases over the next several years as Wheatstone LNG and the Greater Enfield project ramp up, should lead to further improvements in earnings and cash flow.
Woodside’s Baa1 ratings also continue to reflect the company’s large, long-life hydrocarbon reserves and the higher earnings stability provided by its substantial North West Shelf, Pluto LNG, Wheatstone LNG and domestic gas operations, which have medium to long-term off-take contracts primarily with investment-grade counterparties, according to Moody’s.
At the same time, the ratings are constrained by Woodside’s exposure to the cyclical hydrocarbon industry, its limited but improving geographic and operational diversity, the capital intensity of its operations and the sizeable current and potential future project expenditures.
Woodside has highlighted several major projects on which it expects to reach final investment decisions over the next several years. These include the potential expansion of the Pluto LNG facilities following the recent acquisition, the development of the company’s resources off the coast of Senegal, and the potential development of the Browse resources in Western Australia.
These projects, if sanctioned, will come with high capital expenditure requirements, increased execution risk, and may have considerable overlap in timelines.
Moody’s added it will consider the impact of these projects on Woodside’s ratings and outlook once final investment decisions are taken, including regarding their timing and funding structures.