Rating Action Overview
- S&P Global Ratings has revised its industry risk assessment on the oil and gas exploration and production sector to moderately high from intermediate.
- We believe Woodside Petroleum Ltd.'s higher exposure to liquified natural gas (LNG) relative to peers and its low-cost portfolio of assets somewhat mitigate the heightened industry risk.
- We are affirming our 'BBB+' long-term issuer credit rating on Perth-based LNG company Woodside. We are also affirming our 'BBB+' issue rating on the company's senior unsecured debt.
- The negative outlook reflects our view of Woodside's materially weakened financial headroom ahead of its next major capital expenditure (capex) phase.
Rating Action Rationale
Risks for oil companies are escalating amid rising environmental, social, and governance (ESG) awareness and the broader global energy transition. We have revised our industry risk assessment to reflect our view that producers face increased uncertainties about profitability, volatility, and the evolution of the energy transition. Increasing adoption and transition toward renewable energy to address climate change are likely to have broad implications for hydrocarbon demand, prices, and producers of fossil fuels. Based on the greater industry risk and on a relative basis, we view Woodside's business risk to have incrementally weakened and as such we expect moderately stronger financial metrics for the 'BBB+' rating.
The transition will continue to accelerate due to the COVID-19 pandemic and the growing adoption of ESG investment mandates among global investors and financial institutions, in our view. As a result, the risk of divestment and capital market access may become more challenging and costly for hydrocarbon producers. Moreover, declining industry profitability over the past decade underscores increased industry cyclicality.
We believe Woodside's higher exposure to LNG relative to peers and its low-cost portfolio of assets somewhat mitigate the heightened industry risk. Underpinning the company's credit strength is its established track record as an LNG operator with low-cost operations and exposure to mostly low-risk jurisdictions. In addition, Woodside's focus on LNG means the company's operating dynamics can show some resilience compared with many producers selling into spot markets. While LNG companies go through development periods of immense capital intensity, cash flow generation is relatively robust for decades once these facilities are completed, particularly if the operating costs are low. We anticipate that Woodside will implement a sustainable funding strategy for its upcoming major growth projects before any final investment decision is made.
In the global energy transition, developing Asian countries are expected to use LNG as a first step away from their currently high thermal coal dependence. To this end, we expect Asia to lag developed regions where the transition is progressing more rapidly toward renewable energy. We believe Woodside's geographic proximity, cost advantage, and long-standing customer relationships in Asian markets provide it with an advantage in capturing the fundamental energy demand requirements in the region.
While the company's fiscal 2020 (ended Dec. 31) financial performance was weaker than we expected, we believe management remains committed to maintaining credit measures consistent with a 'BBB+' rating through its upcoming growth phase. To maintain the 'BBB+' rating, we expect Woodside to maintain its ratio of funds from operations (FFO) to debt above 45% through the cycle, including project development. This more onerous threshold reflects the impact of our weaker industry risk assessment and Woodside's relative positioning against global peers.
In our opinion, Woodside's ability to maintain its FFO-to-debt above 45% is dependent upon a sustainable funding strategy for its key growth projects: Sangomar, Scarborough, and Pluto Train 2. We believe management has multiple credible and tangible levers to improve the company's FFO-to-debt ratio to above 45% in fiscal 2021 and beyond, including:
- Sell down in Sangomar equity exposure to 40%-50% from 82%;
- Sell down in Pluto Train 2 equity exposure to 50% from 100%;
- Potential sell down in Scarborough upstream equity exposure;
- Adjusting project sequencing and timing;
- A reduction in the dividend payout ratio; and
- Other capital management options, such as capital raisings.
We expect the capex reduction from Sangomar and Pluto Train 2, combined with sales proceeds, will support an improvement in key credit measures. In our view, Woodside is committed to maintaining conservative financial policies through this growth phase and has taken action to protect our rating on the company. The company's continued adherence to its financial policies should ensure its cash flow metrics, specifically its adjusted FFO-to-debt ratio strengthens above 45%.
We believe that Woodside will not take a final investment decision on any upcoming growth projects if there is doubt on the sustainability of recovery in oil prices in the second half of 2021. In this scenario, we would expect operational and financial prudence to bias balance sheet robustness such that a final investment decision is deferred further and cash is conserved.
The negative outlook reflects a one-in-three chance that we would lower the rating to 'BBB' over the next 12-18 months. This is because of the limited buffer at the 'BBB+' rating level for the company to pursue significant capital investment plans, absorb project development delays and cost overruns, or accommodate further material oil price declines. Rating stability will increasingly be reliant on Woodside's willingness to fund future capex in a manner commensurate with the 'BBB+' rating, or a material recovery in oil prices.
We could lower the rating if we expect the company's FFO-to-debt ratio to sustain below 45%. This could occur because of:
- Significant debt-funded growth capex;
- Delays and cost overruns at growth projects;
- Persistently weak oil prices.
We could revise the outlook to stable if we anticipate a sustainable recovery in Woodside's FFO-to-debt ratio above 45% as it executes its growth strategy. This is likely to be a result of a combination of:
- Sustainable funding strategy for its upcoming growth projects;
- Execution of material equity sell down in its major growth projects;
- A sustained recovery in the external oil price environment.
Woodside is primarily an Australia-based producer of LNG (about 70% of 2020 production volume). Its principal production activities are in the Carnarvon Basin offshore of Western Australia. The company produced 100.3 million barrels of oil equivalent (mmboe) of oil and gas products in 2020 and is the operator of a series of joint ventures that make up the North West Shelf Venture (NW Shelf), which is located in the Carnarvon Basin. Woodside also operates the Pluto LNG plant and platform (Pluto), which is located 180km northwest of Karratha, Western Australia.
Our Base-Case Scenario
- Asia-Pacific real GDP growth of 4.0% in 2021 and 3.2% in 2022;
- Brent crude prices of US$50 per barrel (bbl) in 2021 and 2022, and US$55/bbl in 2022 and thereafter;
- Australian dollar to U.S. dollar exchange rate of US$0.73 in 2021 and US$0.74 in 2022;
- Forecast production volumes of between 90 mmboe and 95 mmboe in 2021;
- Production costs of about US$5/boe in 2021;
- Capex of US$2.9 billion-US$3.2 billion in fiscal 2021 (without targeted equity reduction);
- Dividend payout ratio of 50%-80% underlying net profit after tax; and
- Activated dividend reinvestment plan.
Based on these assumptions and various sensitivities, we estimate the following credit measures:
- FFO-to-debt of 37% to 47% in 2021, and similar in 2022;
- Debt-to-EBITDA of between 1.9x to 2.7x in 2021 and 2022;
- Negative discretionary cash flow (after dividends).
We assess Woodside's liquidity as strong. We expect the company's liquidity sources to exceed uses by more than 1.5x over the next 12 months and will remain above 1.0x over the subsequent 12-month period. Sources would exceed uses even if EBITDA declines by 30%.
The group maintains solid banking relationships. We expect Woodside to retain access to bank and debt capital markets, which was most recently demonstrated in 2020, when the company completed a US$600 million syndicated facility with a term of seven years.
Our assessment of the company's liquidity over the next 12 months considers the following sources and uses as of Dec. 31, 2020:
Principal liquidity sources:
- Cash on hand of about US$3.6 billion;
- About US$3.1 billion in undrawn bank facilities maturing beyond 12 months; and
- Our estimate of about US$2.1 billion cash FFO in 2021.
Principal liquidity uses:
- US$700 million 144a note maturity in 2021;
- Capex of US$2.9 billion-US$3.2 billion in fiscal 2021 (without targeted equity reduction); and
- Dividend payout of 50%-80% of underlying net profit after tax.
The company has ample headroom under its financial covenants. Based on our forecasts, we expect the company to be in compliance with significant headroom over the next two years.
Issue Ratings - Subordination Risk Analysis
As of Dec. 31, 2020, Woodside's capital structure consisted of about US$6.2 billion of drawn debt. The company's weighted-average debt maturity was 4.4 years as of Dec. 31, 2020.
Funding is well-diversified through a mix of bilateral facilities, syndicated bank facilities across both domestic and international banks, as well as offshore medium-term notes and bonds in the U.S. 144A Reg. S market.
We rate Woodside's debt at 'BBB+', in line with the issuer credit rating, given that no significant elements of subordination risk are present in the capital structure.
Ratings Score Snapshot
Issuer Credit Rating: BBB+/Negative/--
Business risk: Satisfactory
- Country risk: Very low
- Industry risk: Moderately high
- Competitive position: Satisfactory
Financial risk: Intermediate
- Cash flow/Leverage: Intermediate
- Diversification/Portfolio effect: Neutral (no impact)
- Capital structure: Neutral (no impact)
- Liquidity: Strong (no impact)
- Financial policy: Positive (+1 notch)
- Management and governance: Satisfactory (no impact)
- Comparable rating analysis: Neutral (no impact)
Stand-alone credit profile: bbb+
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
|Ratings Affirmed; CreditWatch/Outlook Action|
Woodside Petroleum Ltd.
|Issuer Credit Rating||BBB+/Negative/NR||BBB+/Watch Neg/NR|
Woodside Petroleum Ltd.
|Senior Unsecured||BBB+||BBB+/Watch Neg|
Woodside Finance Ltd.
|Senior Unsecured||BBB+||BBB+/Watch Neg|
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
|Primary Credit Analyst:||Victor Lai, CFA, Melbourne + 61 3 9631 2008;|
|Secondary Contact:||Graeme A Ferguson, Melbourne + 61 3 9631 2098;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.