02.10.2015, 12:49
Fitch Affirms Origin Energy at 'BBB' on Plans to Cut Debt; Outlook Stable
OREANDA-NEWS. Fitch Ratings has today affirmed Origin Energy Ltd's (Origin) Long-Term
Foreign-Currency Issuer Default Rating (IDR) and its foreign-currency
senior unsecured rating at 'BBB' after the company announced plans to
reduce its debt. The Outlook on the IDR is Stable.
The agency has also affirmed Origin Energy Finance Ltd's foreign-currency senior unsecured rating at 'BBB'.
On 30 September 2015, Origin announced a series of capital initiatives to strengthen its balance sheet. This included the launch of a AUD2.5bn fully underwritten pro rata renounceable entitlement offer and AUD2.2bn of cash generating initiatives through to financial year ending 30 June 2017 (FY17), including AUD800m of cash proceeds from the sale of some non-core assets. Overall, Fitch views the company's initiatives to strengthen its balance sheet amidst a weak operating environment as positive for its credit profile, although such improvements will not result in any immediate positive action on Origin's ratings.
KEY RATING DRIVERS
Capital Initiatives Support Ratings: Origin proposes to use the proceeds from new equity issuance, lower dividend payments and capex cuts to lower debt and reduce reliance on contributions from its joint venture, Australia Pacific LNG (APLNG), for maintaining its credit profile. These capital initiatives will support its current rating against weak cash generation from low oil prices.
Slower Deleveraging: The company's new debt reduction initiatives will result in improved credit metrics, although we still expect the company's financial leverage (as measured by adjusted net debt to FFO) to remain weaker than levels comfortable for its 'BBB' ratings (of less than 3.0x) through FY18. This takes into account higher capex in FY16 on account of additional investments required in APLNG, but excludes any proceeds from the proposed asset sales through FY17. Our updated forecasts also do not include material investments relating to the development of exploration permits at the Poseidon field off Western Australia, which could add pressure on the company's credit profile if the investments proceed.
Weaker LNG Cash Flows: Origin's exposure to oil and oil price-linked revenue will be substantially higher, following commencement of operations at APLNG's liquefaction project in FY16. The rating incorporates the impact of sustained pressures on oil prices and weaknesses in the liquefied natural gas (LNG) markets since our last rating action on Origin on 6 August 2015, when its rating was downgraded to "BBB/Stable" from "BBB+/Negative". Fitch's forecasts for Origin incorporate remaining investments required in APLNG to bring the project to completion and lower cash contributions from APLNG, reflecting both the low oil price environment and slower production ramp-up phase over the next two years. Remaining execution risks associated with the APLNG liquefaction project, however, appear to be low as the project remains largely on schedule to deliver its first LNG cargo from train 1 in 4Q15.
Continued Difficult Operating Conditions: Origin faces competitive pressures, which are reflected in margin pressures across its incumbent utility businesses. Fitch expects these pressures to continue in the near term, with any margin recovery likely to be gradual and no meaningful improvement in the near term. These developments coincide with a phase of heavy investment by Origin, especially on upstream assets.
Origin has issued three hybrids of EUR1bn in September 2014, AUD900m in December 2011 and EUR500m in June 2011. Under Fitch's hybrid criteria, the September 2014 euro hybrid has been assigned 50% equity credit till 16 September 2039, the December 2011 Australian dollar hybrid 50% equity credit till 22 December 2031, and the June 2011 euro hybrid has been assigned 50% equity credit till 16 June 2016.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- AUD2.5bn proceeds from underwritten equity issuance in FY16:
- AUD1.6bn proceeds from divestment of shares in Contact Energy in FY16;
- Gradual improvement in EBITDA margin for the energy markets business to 12.8% by FY17;
- Contribution from APLNG's liquefaction exports based on Fitch's Brent price deck;
- FY16 capex of about AUD2.8bn, declining to about AUD700m in FY17; and
- Lower dividend payments of AUD265m over FY16 and FY17
RATING SENSITIVITIES
Positive: Fitch does not expect any positive rating action over the medium term. However, future developments that may, individually or collectively, lead to a positive rating action include forecast FFO adjusted net leverage below 2.5x (FY15: 6.7x); and FFO gross interest cover increasing above 5.0x (FY15: 2.7x), both on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include forecast FFO adjusted net leverage above 3.0x and FFO gross interest cover falling below 4.5x, both on a sustained basis.
Negative rating actions are also likely to result from material increases in project costs and timing delays at APLNG; materially lower-than-expected contributions from APLNG; commitment to sizeable growth capex; and margin deterioration, in excess of Fitch's expectations, in respect of its incumbent utilities businesses over the next two years.
The agency has also affirmed Origin Energy Finance Ltd's foreign-currency senior unsecured rating at 'BBB'.
On 30 September 2015, Origin announced a series of capital initiatives to strengthen its balance sheet. This included the launch of a AUD2.5bn fully underwritten pro rata renounceable entitlement offer and AUD2.2bn of cash generating initiatives through to financial year ending 30 June 2017 (FY17), including AUD800m of cash proceeds from the sale of some non-core assets. Overall, Fitch views the company's initiatives to strengthen its balance sheet amidst a weak operating environment as positive for its credit profile, although such improvements will not result in any immediate positive action on Origin's ratings.
KEY RATING DRIVERS
Capital Initiatives Support Ratings: Origin proposes to use the proceeds from new equity issuance, lower dividend payments and capex cuts to lower debt and reduce reliance on contributions from its joint venture, Australia Pacific LNG (APLNG), for maintaining its credit profile. These capital initiatives will support its current rating against weak cash generation from low oil prices.
Slower Deleveraging: The company's new debt reduction initiatives will result in improved credit metrics, although we still expect the company's financial leverage (as measured by adjusted net debt to FFO) to remain weaker than levels comfortable for its 'BBB' ratings (of less than 3.0x) through FY18. This takes into account higher capex in FY16 on account of additional investments required in APLNG, but excludes any proceeds from the proposed asset sales through FY17. Our updated forecasts also do not include material investments relating to the development of exploration permits at the Poseidon field off Western Australia, which could add pressure on the company's credit profile if the investments proceed.
Weaker LNG Cash Flows: Origin's exposure to oil and oil price-linked revenue will be substantially higher, following commencement of operations at APLNG's liquefaction project in FY16. The rating incorporates the impact of sustained pressures on oil prices and weaknesses in the liquefied natural gas (LNG) markets since our last rating action on Origin on 6 August 2015, when its rating was downgraded to "BBB/Stable" from "BBB+/Negative". Fitch's forecasts for Origin incorporate remaining investments required in APLNG to bring the project to completion and lower cash contributions from APLNG, reflecting both the low oil price environment and slower production ramp-up phase over the next two years. Remaining execution risks associated with the APLNG liquefaction project, however, appear to be low as the project remains largely on schedule to deliver its first LNG cargo from train 1 in 4Q15.
Continued Difficult Operating Conditions: Origin faces competitive pressures, which are reflected in margin pressures across its incumbent utility businesses. Fitch expects these pressures to continue in the near term, with any margin recovery likely to be gradual and no meaningful improvement in the near term. These developments coincide with a phase of heavy investment by Origin, especially on upstream assets.
Origin has issued three hybrids of EUR1bn in September 2014, AUD900m in December 2011 and EUR500m in June 2011. Under Fitch's hybrid criteria, the September 2014 euro hybrid has been assigned 50% equity credit till 16 September 2039, the December 2011 Australian dollar hybrid 50% equity credit till 22 December 2031, and the June 2011 euro hybrid has been assigned 50% equity credit till 16 June 2016.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- AUD2.5bn proceeds from underwritten equity issuance in FY16:
- AUD1.6bn proceeds from divestment of shares in Contact Energy in FY16;
- Gradual improvement in EBITDA margin for the energy markets business to 12.8% by FY17;
- Contribution from APLNG's liquefaction exports based on Fitch's Brent price deck;
- FY16 capex of about AUD2.8bn, declining to about AUD700m in FY17; and
- Lower dividend payments of AUD265m over FY16 and FY17
RATING SENSITIVITIES
Positive: Fitch does not expect any positive rating action over the medium term. However, future developments that may, individually or collectively, lead to a positive rating action include forecast FFO adjusted net leverage below 2.5x (FY15: 6.7x); and FFO gross interest cover increasing above 5.0x (FY15: 2.7x), both on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include forecast FFO adjusted net leverage above 3.0x and FFO gross interest cover falling below 4.5x, both on a sustained basis.
Negative rating actions are also likely to result from material increases in project costs and timing delays at APLNG; materially lower-than-expected contributions from APLNG; commitment to sizeable growth capex; and margin deterioration, in excess of Fitch's expectations, in respect of its incumbent utilities businesses over the next two years.
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