OREANDA-NEWS. Fitch Ratings has affirmed Ras Laffan Liquefied Natural Gas Company Limited (II)'s (RasGas (II)) and Ras Laffan Liquefied Natural Gas Company Limited (3)'s (RasGas (3); together, the company or RasGas) senior secured bonds at 'A+' with Stable Outlooks.

The affirmations reflect the close operational and strategic ties that link RasGas's debt ratings to the state of Qatar (AA/Stable), as assessed by Fitch's Parent and Subsidiary Rating Linkage criteria. Qatar's strong dependence on the revenue from its hydrocarbon sector, of which RasGas is a vital component, puts the project in an exceptionally strong position in terms of criticality of support. The Stable Outlook reflects the Outlook on Qatar's rating as well as sound operating and financial performance of RasGas.

The standalone rating of RasGas's bonds remains 'A+' due to the project's high financial flexibility to withstand stresses on oil and gas prices as observed in the current operating environment.

KEY RATING DRIVERS
Strong Links With Qatar
The parent/subsidiary relationship with the state of Qatar is established through 70% ownership of RasGas by Qatar Petroleum, a fully state-owned company responsible for all oil and gas industry processes in Qatar and abroad. The two-notch differential from Qatar's rating reflects strong strategic ties, moderate operational ties and the absence of direct legal ties between the state of Qatar and RasGas.

The strong strategic ties derive from RasGas's 40% contribution to Qatar's LNG output. Hydrocarbons are the cornerstone of Qatar's economy, contributing about 80% of budget revenues over the past five years. The moderate operational ties are reflected in high management control through the board composition of RasGas.

However, legal ties are weak as RasGas is explicitly structured as a ring-fenced project without explicit sovereign guarantees. The support to RasGas from the state of Qatar is expected to be forthcoming in case of need. However, Fitch acknowledges that the support may not be equivalent to servicing of the entity's debt due to the absence of explicit guarantees, and that support may be routed through Qatar Petroleum rather than coming directly from the government. These risks are reflected in the 'A+' rating being two notches down from the sovereign rating.

Standalone Rating Remains 'A+'
Fitch considers that RasGas's standalone credit quality remains consistent with the 'A+' rating due to its high financial flexibility and strong competitive position within the global LNG industry to withstand major market downturns as is currently taking place. RasGas's technical performance continues to be positive, as demonstrated by high utilisation and reliability factors and stable production levels.

RasGas's 2015 revenues were 38% lower than in 2014 due to lower oil and LNG selling prices, but still very strong at USD 17.4bn. Revenues from condensates and other oil products (about 25% of total) reflected the full decline of oil prices while the decline in revenues from LNG sales was moderated by the contractual pricing formulas in the long-term agreements. Average achieved Brent price from the sale of condensates and other oil products was USD52.5/bbl while average achieved LNG selling price was USD8.94/Mmbtu. Fitch notes a higher share of LNG sold on a spot basis (22%) in 2015, which was mainly due to lower volumes taken by Petronet prior to a pricing formula re-negotiation at the end of 2015. Despite the decline in 2015 revenues, debt metrics remained solid and debt service coverage ratio (DSCR) was 12.7x, above Fitch's base case expectation.

Revenues and cash flows will decline further in 2016 due to lower price expectations as well as the re-negotiation of the contractual formula with Petronet. RasGas expects that the average LNG selling price in 2016 will be USD5.85/Mmbtu assuming USD40/bbl Brent. The share of LNG spot sales is expected to be lower in 2016, but is likely to increase again starting from 2017 onwards as some of the off-take agreements with Korea Gas Corporation (KOGAS, AA-/Stable) and CPC Corporation (A+/Positive) will expire. We do not currently view this as a risk due to RasGas's competitive position within the industry and demonstrated ability to sell on a spot basis.

Fitch expects debt metrics to remain solid, helped by the implementation of some operating cost savings. Under the conservative Fitch rating case, which now assumes long-term stress case oil price of USD40/bbl as well as output and cost stresses, the average DSCR over the remaining debt life until 2027 is 5.9x. We estimated in our January 2016 report that RasGas's break-even prices for servicing its senior debt are around USD 20/bbl for oil and USD2/Mmbtu for LNG over 2016-2018, rising to USD28/bbl and USD2.8/Mmbtu in 2019 when bullet debt repayment is due (see Fitch: Rated O&G Infrastructure Projects Can Withstand USD 20 Oil).

Peers
Nakilat Inc is a vessel operator servicing the Qatari LNG industry and its senior debt is rated 'A+'/Stable, two notches down from Qatar's rating. Dolphin Energy Limited extracts gas from the same offshore field in Qatar, but exports it via a subsea pipeline to Abu Dhabi, mostly under long-term fixed-priced contracts. Dolphin Energy Limited is currently rated 'A+'/Stable on a standalone basis.

RATING SENSITIVITIES
A change in Qatar's rating could lead to a corresponding rating action on RasGas's bonds. However, an upgrade could be constrained by the absence of explicit legal ties.

SUMMARY OF CREDIT
RasGas (II) and RasGas (3) operate three 4.7mtpa LNG trains (Trains 3, 4 and 5 - RasGas (II)) and two 7.8 mtpa LNG trains (Trains 6 & 7 - RasGas 3) at the Ras Laffan Industrial City of Qatar. RasGas's aggregated notional capacity is 29.7mtpa. The project derives its revenues from the sale of LNG and the rest from associated products (primarily condensates and LPG). LNG is mostly sold under 20 to 25 years "take-or-pay" sale and purchase agreements to a diversified pool of offtakers. Associated products are sold in the global markets at prevailing market prices.