OREANDA-NEWS. Fitch Ratings has affirmed Australia-based Woodside Petroleum Ltd's (Woodside) Long-Term Foreign-Currency Issuer Default Rating (IDR) and its foreign-currency senior unsecured rating at 'BBB+'. The Outlook on Woodside's IDR has been revised to Negative from Stable. At the same time, the agency has affirmed Woodside's Short-Term IDR at 'F2' and simultaneously withdrawn this rating, as Fitch no longer considers it relevant to the agency's coverage.

The Outlook revision reflects Woodside's lower rating headroom under sustained low oil prices and weakness in the liquefied natural gas (LNG) markets; Fitch forecasts Woodside's credit metrics to remain weaker than those comfortable for its 'BBB+' ratings through 2017 and possibly 2018.

KEY RATING DRIVERS

Low Oil Prices, Lower Headroom: The Negative Outlook reflects Woodside's limited rating headroom under its 'BBB+' rating over the next two to three years. Fitch expects Woodside's credit metrics to remain outside the tolerance level for its rating, at least through 2017, due to muted earnings from lower oil prices and weaknesses in the LNG market.

LNG Revenues Affected: Woodside faces lower oil-linked LNG revenues in 2016 amid the low oil price environment and its financial profile is now reflecting the lagged effect of oil prices on LNG prices, which is typical under Asian LNG contracts. Fitch believes oil prices are likely to remain low for longer than previously expected, with limited prospects for price recovery in 2016 and continued near-term volatility.

Dividend Cut, Investment Deferred: The rating affirmation reflects Fitch's view that Woodside's decision to reduce dividends and reactivate its dividend reinvestment plan supports its ability to improve its credit profile to a level appropriate for its ratings over the medium term. Woodside has also indefinitely deferred the final investment decision on its proposed Browse LNG project and is targeting USD800m in productivity benefits by end-2016. The company will likely exceed these savings, but its ratings could come under pressure if the recovery in oil price significantly falls short of Fitch's base case expectations.

Limited Growth, Bolt-On Acquisitions: Woodside reduced its estimate for total capex and exploration expenditure to USD2bn for 2016, from USD6bn in 2015. Medium-term forecast growth capex is minimal, reflecting the lack of organic growth opportunities due to weak energy prices, high cost of greenfield developments in Australia and demand-supply dynamics in the Asian LNG market. Woodside may consider smaller bolt-on acquisitions and lower cost exploration opportunities with upside potential in the future. Any significant debt-funded investment commitments will add to pressure on its ratings.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- production volumes within company guidance for 2016 of 86 million barrel per oil equivalent (mmboe) to 93mmboe and average production growth of 1.5% over 2017 to 2019
- oil price based on Fitch's Brent price-deck, lower LNG prices and domestic gas prices over 2016 to 2019
- gradual reduction in gas and oil unit production costs through 2019
- cash flow capex and exploration expenditure for 2016 of about USD2bn, but declining to average about USD975m over 2017 to 2019
- dividend pay-out ratio of 80% in line with historical levels
- no material growth capex or investments

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- The Outlook may revert to Stable at the current rating if Woodside's forecast adjusted net leverage remains below 2.5x and FFO fixed-charge coverage remains above 5.0x, both on a sustained basis.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- forecast adjusted net leverage increases above 2.5x and forecast funds from operations (FFO) fixed-charge coverage deteriorates below 5.0x, both on a sustained basis.
- Negative rating action may also occur from a commitment by Woodside to any significant debt-funded investment including acquisitions, before its financial profile improves a level that is comfortable for its 'BBB+' rating.

LIQUIDITY

Woodside had USD1.7bn of cash and undrawn facilities at 31 December 2015, with ready access to debt markets and bank funding. Its debt maturity profile remains comfortable, with average term to maturity of 4.7 years at end-2015, with negligible maturities in 2016 and 2017.