OREANDA-NEWS. Fitch Ratings has affirmed Australia-based Woodside Petroleum Limited's (Woodside) Long- and Short-Term Foreign-Currency Issuer Default Ratings (IDR) at 'BBB+' and 'F2', respectively. Its foreign currency senior unsecured rating has also been affirmed at 'BBB+'. The Outlook on the Long-Term IDR is Stable.

KEY RATING DRIVERS
Reduced Rating Headroom: Lower than forecasted LNG revenues amid low oil prices and the debt-funded acquisition of Apache Corporation's (Apache, 'BBB+'/Stable) equity in two liquefied natural gas (LNG) projects in April 2015, will reduce its rating headroom. The company is also expected to make a Final Investment Decision (FID) on its Browse LNG project by end-2016. Its ratings could come under pressure if funding requirements add a material amount of debt such that its financial leverage increases to levels not commensurate with its BBB+ rating for a sustained period of time.

Lower Forecast LNG Revenues: Woodside's rating benefits from partial commodity exposure given its sizeable share of LNG revenues. This relates to a large portion of LNG offtake on long-term contracts, which differentiates it from a pure upstream company and the limitations on the full use of Fitch's oil and gas price deck. Higher LNG revenues in the financial year ended 31 December 2014 (FY14), reflect the material price revisions in Pluto revenue contracts. Woodside, however, faces lower oil-linked LNG revenues in FY15 amid the low oil price environment and lagged effect of oil prices which is typical of Asian LNG contracts.

Near-Term Expenditure Flexibility: Woodside is targeting USD800m in productivity benefits by end-2016 in response to the low oil price environment. Fitch notes that Woodside is on track to achieve these savings as per its 2015 investor briefing on 21 May 2015. Fitch expects these measures will support Woodside's credit profile amid a low oil price environment, in addition to a delay in commitment to material debt-funded growth capex.

New Growth Phase Expected: FY14 total cashflow capex and exploration expenditure is significantly lower at USD697m, down from USD1.9bn in FY12. Woodside, however, has a sizeable development programme of gas resources located in the north and north-west of Australia. Uncommitted growth capex remains sizeable in the medium term, with the Browse LNG development likely to commence in late-2016. Exploration capex is also expected to remain high as Woodside ramps up presence across a number of locations in Africa, Asia and Europe.

Execution Risks Remains High: Woodside also faces competition for development resources and long-term sales contracts from a significant number of other LNG projects. Fitch expects upward pressure on capital costs and development delays to continue as labour and other project development inputs become scarcer. Sizeable buyer appetite for high-cost supplies from new greenfield Australian LNG projects is likely to be a challenge, including that for Woodside's proposed Browse LNG project.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- FY15 production volumes as per company guidance and average growth of about 2.25% over FY16 and FY17.
- Oil price based on Fitch's Brent price deck, declining LNG prices and steady domestic gas prices over FY15 to FY17
- Gradual reduction in gas unit production costs but steady oil unit production costs over FY15 to FY17
- FY15 capex, including acquisitions, of about USD6bn but declining to average about USD1.9bn over FY16 and FY17
- Stable dividend pay-out ratio of 80% over FY15 to FY17

RATING SENSITIVITIES
Positive: Fitch considers an upgrade unlikely over the medium term, due to significant uncommitted growth capex in the pipeline. The companies rated by Fitch in the 'A' rating categories are generally larger and more diversified and with a more conservative financial profile to counter any exposure to commodity price volatility.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include adjusted net funds from operations (FFO) leverage rising above 2.5x, and FFO fixed charge coverage falling below 5.0x, both on a sustained basis (0.5x and 8.8x respectively for FY14). Fitch will treat a commitment to any significant debt-funded project as a rating event.