STOCKHOLM: S&P Global Ratings have upgraded Norwegian oil and gas company Aker BP to ‘BBB-‘; with stable outlook.
Production is increasing and the company retains capital flexibility. The upgrade stems from the view that the production increase stemming from new barrels at Johan Sverdrup will boost Aker BP’s operating cash flows and consequently its credit metrics.
Phase 1 will net AKER BP 50,000 barrels of oil equivalent per day (boepd) at plateau. In addition, despite increasing dividends, approved capital expenditure (capex) is now much lower, at $500 million-$1 billion for 2020. This means the company has ample financial flexibility, for example to invest in new projects, existing fills (Valhall or Hod), and new areas such as NOAKA in the North Sea.
It can also continue its successful exploration efforts, which have yielded discoveries of about 350 million barrels of new oil resources. “As such, we believe the company can balance capital spending, shareholder distributions, and its balance-sheet strength by adapting to the market environment and oil price developments,” S&P said in a release.
Further improvement of the business risk profile is an important factor for the ‘BBB-‘ rating. We view Aker BP’s scale and diversification as lagging that of most peers rated ‘BBB-‘ or ‘BBB’. The company’s key strength versus peers is the high share of oil in the production mix and higher FFO per barrel (see chart 1). Moreover, Aker BP’s financial profile is solid.
“We anticipate FFO to debt rising to around 55% or higher in 2020-2021 after around 35% in 2019 (before the Johan Sverdrup impact), overall declining production costs, and an increase in high-value oil barrels; pro forma Johan Sverdrup, we anticipate an 85:15 oil-to-gas ratio”.
With a dividend policy that raises the cash dividend by $100 million per year through 2023 to reach $1.15 billion, S&P thinks the company will need to continue expanding and investing. This will be particularly important in the years to come as taxable income increases due to larger hydrocarbon sales volumes.
“The high tax rate in Norway will mechanically lead to higher cash tax payments. Because of this, and the Norwegian’s government’s subsidies for exploration and capex through material reimbursement, we can expect further spending from Aker BP. Under our base case, we assume full dividend payments in line with the company’s plan ($850 million in 2020) but rather limited capex at $1 billion per year. If the company spends more, its cash taxes will reduce, and production would likely increase beyond what we currently anticipate. Overall, we forecast discretionary cash flow will be positive in 2020 and neutral in 2021”.
The stable outlook reflects expectation that Aker BP will maintain FFO to debt above 45% on average, on the back of strongly increasing production. We also believe the company will maintain capex and dividends broadly in line with free cash flow. Although high capex can result in a temporary increase in leverage, this would occur in the context of the favorable Norwegian fiscal regime.
“We could lower the ratings if Aker BP’s credit measures weaken, such that FFO to debt is projected to stay below 45% for a long period. This could occur if crude oil and natural gas prices were to fall and remain below our long-term assumption of $55 per barrel (/barrel) of Brent, and there were no offsetting measures, such as dividend cuts or capex reductions. Additionally, further increases in shareholder distributions that are higher than currently anticipated, and debt funded, could also lead to a downgrade.
“We view an upgrade over the next 12-24 months as unlikely, owing to Aker BP’s smaller scale and scope than ‘BBB’ rated peers. We expect Aker BP would require significant capex to develop its own resources, or further large acquisitions to improve its business risk profile to that of ‘BBB’ rated peers. The company would also need to maintain FFO to debt greater than 45% under prevailing industry conditions”.