London: Fitch Ratings has affirmed Dolphin Energy Limited’s (DEL) bonds
$1.25b secured bonds due June 15, 2019 at A+ with outlook stable. Fitch also $1.3b secured bonds due December 15 2021, affirmed at A+ outlook stable.
The affirmation reflects the strong results achieved by DEL so far in 2014 and Fitch’s expectation of the company continuing its stable operating and financial performance. Robust operational performance, high commodity prices and strong gas demand in the UAE and Oman continue to result in debt metrics above Fitch’s expectations.
The latest annual debt service coverage ratio (DSCR) stood at a solid of 5.13x as of June 2014. Fitch’s base case projects average and minimum DSCRs at 4.49x and 2.8x respectively over the life of the debt. The ratings are constrained to the ‘A’ category, notably by counterparty risk and the project’s single-facility nature.
Fitch assesses DEL’s revenue risk as Stronger. The project’s long-term fixed-price gas supply contracts currently account for around 40% of DEL’s gross margin. This solid revenue base is a material stabilising factor that mitigates DEL’s exposure to commodity prices from upstream revenues and short-term third-party gas sales. Due to the strong base of long-term contracts, DEL can withstand substantial oil price declines to below 20USD/bbl.
Fitch’s base case uses moderate price assumptions for liquids (long-term Brent price of 82.5USD/bbl) and does not take into account in its analysis the EBITDA contribution from the sale of third-party gas bought by DEL from Qatar Petroleum (QP). These sales are viewed as an addition to DEL’s business and in Fitch’s opinion do not worsen the project’s risk profile, as DEL essentially acts as an intermediary between QP and the offtakers of third-party gas. The additional gas volumes do not weigh on the project’s technical risk profile.
The relative weakness of some DEL’s natural gas offtakers is mitigated by DEL’s competitive gas price under long-term contracts, which provides offtakers with a strong incentive to perform. More generally, the growing natural gas deficit in UAE and Oman makes the project’s reliable gas supply critical to the local economies and supports Fitch’s view that DEL would be able to find alternative customers if required.
Fitch assesses DEL’s operational risk as Midrange, as the project’s facilities are fairly complex but have been performing strongly, as evidenced by DEL’s ability to consistently meet the maximum production targets under the development and production sharing agreement (DPSA) since the start of operations in 2007. DEL’s operating costs have been either in line or below expectations, and the company currently does not expect extraordinary maintenance works. On-going technical issues are resolved during scheduled maintenance shutdowns with no impact on production and availability. The most recent maintenance shutdown was completed successfully in February 2014.
The works on the addition of three additional compressors at Ras Laffan plant (six are already in operation) to increase the export pipeline’s capacity to its 3.2bcfd (billion cubic feet per day) maximum are continuing and commissioning is expected for 1H15. The works are funded by the sponsors, no additional debt or use of internally generated cash.
The project’s exposure to supply risk is assessed as Stronger. Reserve consultants Netherland, Sewell and Associates Inc. estimated that 1P developed reserves (the level of production likely to be reached or exceeded with a 90% probability using existing infrastructure) are sufficient to cover the base case requirements until 2027. DEL has begun closer monitoring of reservoir performance this year so as to be able to plan corrective action, such as drilling further wells or introducing compression, if required. Fitch will continue to monitor the developments.
Fitch assesses DEL’s debt structure as Midrange, reflecting the complexity of the project’s structure (upstream-midstream split, dual waterfall etc.) together with fairly strong structural features. Refinancing risk related to the 2021 bullet bond and associated shareholder debt is largely addressed by a sinking fund, which traps 100% of the refinancing requirement in Fitch’s base case. In our stress case, the mechanism traps more than 80% of the bullet.