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June 18 (The following statement was released by the rating agency)
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.
This follows Woodside's announcement on 17 June 2014 of a binding buy-back agreement with Shell Energy Holdings Australia Limited (Shell) to purchase 78.3m shares from Shell at a total consideration of USD2.68bn. These shares represent approximately 9.5% of Woodside's current issued share capital. The proposed buy-back will be funded from a combination of existing cash and debt facilities.
Transaction is subject to various approvals, including an extraordinary shareholders' general meeting to vote on the transaction, expected in August 2014. Fitch expects Woodside's financial leverage (as measured by adjusted net debt to funds from operations (FFO) leverage) and FFO fixed charge coverage to remain stronger than the levels required for its current ratings (of less than 2.5x and more than 5.0x, respectively) through to FY16.
KEY RATING DRIVERS
Greater Rating Headroom: Increased cash flow generation, lower capex, and improved revenue and operational diversity have resulted in increased headroom within Woodside's current 'BBB+' rating. Fitch's modelling of Woodside's cash flows and debt highlights the ability to support sizeable additional growth capex in a phased manner, and higher dividend payments, as reflected in the company's 2013 results. Any immediate rating upside is, however, limited due to the constraints imposed by its business risk profile in terms of the size and scale of its reserves and operations, relative to its 'A' rated oil & gas upstream peers. In addition, limited organic growth options will require Woodside to seek growth via new investments which can lead to sizeable debt funded growth capex in the future.
Measured Growth Capex Approach: 2013 total capex is significantly lower at USD710m, down from USD1.9bn in 2012. Woodside's total capex guidance is approximately USD1.8bn per annum over 2015 to 2017, as disclosed in its investor briefing on 22 May 2014. Woodside announced its decision to exit the Israel-based Leviathan gas development on 21 May 2014. Further, the Browse LNG development is more likely to commence in late 2015. Uncommitted growth capex, however, remains sizeable in the medium term, and any significant debt-funded project announcement will constitute a rating event.
Limited Growth Prospects: Lower committed capex in 2013, modest success in exploration activities in Australia and offshore, the decision to exit the Leviathan development in 1H14, increasing development risks associated with the Browse LNG project, and expansions at Pluto and Sunrise fields development, reflect the lack of near-term growth prospects. Woodside is, therefore, likely to pursue higher dividend payments in the near-term.
Positive: Fitch considers an upgrade unlikely over the medium-term, due to significant uncommitted growth capex in the pipeline.
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 (1.2x and 6.1x respectively for 2013).