Nov 8 - Fitch Ratings has placed UK-based BG Energy Holdings Limited’s (BG) Long-term Issuer Default Rating (IDR) of ‘A’ and Short-term IDR of ‘F1’ on Rating Watch Negative (RWN). A full list of rating actions can be found below. The RWN reflects a substantial reduction in BG’s planned oil and gas production growth for 2012 and 2013, which undermines the company’s track record of meeting production targets. This track record had been key to Fitch’s decision to tolerate higher credit metrics in the next two to three years than are usually comfortable for an ‘A’ rating for this type of company. Fitch expects to resolve the RWN in early 2013 following the completion of BG Group’s business planning process, which is currently ongoing. Fitch will need to assess the impact of the recent downward revision of the output growth on the company’s capital expenditure programme and production strategy over the next two to five years to resolve the RWN. As the company’s credit metrics are high for its current rating, continuous ambitious investments coupled with failure to deliver on set production targets would likely result in a downgrade. The company has recently lowered its production growth projection to about 3% for 2012 and 0% for 2013. As a result, 2013 production volumes will be broadly in line with the production achieved in 2010. This revision could lead to delays in achieving the company’s long-term production expansion plans of 6%-8% average CAGR from 2005 to 2020. Although BG operates on a smaller scale than its similarly rated peers, Fitch considers its favourable cost position and history of production growth as mitigating factors. The lowered production outlook is due to several challenges facing BG ranging from delays or shutdowns in the North Sea, a less effective than expected compression project in Egypt, an extended schedule for the tie-in of wells for the next two FPSOs in Brazil and scaled back drilling in the US due to low natural gas prices. Fitch projects a deterioration in BG’s funds from operations (FFO) adjusted net leverage to about 2.6x in 2014, up from 1.8x at end-2011, based on the agency’s oil and gas price deck that assumes a gradual decline in oil prices from USD90 per barrel in 2013 to USD70 per barrel in 2015. This deterioration in leverage is due to the company’s growth strategy and large planned capex, mostly related to its projects in Australia and Brazil. If the company fails to reduce leverage after 2014, when the LNG project in Australia comes on stream and with increasing contribution from production in Brazil, this would put further pressure on the ratings. BG aims to lower the negative impact of its ambitious capital expenditure on credit ratios through a capital release programme for 2012-2013. This programme mostly relates to the disposals of transmission and distribution assets and the recently disclosed sale of a stake in the Australian Queensland Curtis LNG (QCLNG) project to China National Offshore Oil Corporation for USD1.93bn. BG has now completed or reached asset sales agreements that should release approximately USD7.6bn of capital by mid-2013, which is more than the USD5bn capital release plan for 2012-2013 announced in February 2012. The June 2012 issue of hybrid notes totalling USD2.07bn with 50% equity credit (as classified by Fitch) also supports BG’s balance sheet. Fitch believes that slower than expected production expansion could heighten the inherent execution risk in BG’s operations as the company aims at a substantially larger than industry average increase in hydrocarbons production by 2015. BG is also exposed to potential delays and cost overruns due to the large projects currently being implemented. In May 2012, the company announced that the 2011-2014 capex for one of its key projects, the QCLNG project in Australia, will increase by 36% to USD20.4bn; approximately half of the increase relating to changes in the Australian dollar/US dollar exchange rate. BG’s liquidity position at end-September 2012 comprised USD4.6bn of cash and USD5bn of unused committed long-term facilities. This liquidity was sufficient to cover short-term debt obligations of USD1.6bn and Fitch’s projected negative free cash flow (FCF) of about USD6bn for the next 12 months (calculated using the agency’s oil and gas price deck). The ongoing capital release plan provides additional liquidity. In November, the company signed a new five-year USD3bn syndicated committed credit facility, which replaced USD2.3bn of expiring bilateral committed credit lines. Fitch’s projected negative FCF for BG for 2012-2015 leaves the company dependent on continued borrowings, although BG has demonstrated good access to the capital markets. In June 2012 BG issued hybrid bonds of USD2.07bn equivalent, due in 2072. Fitch has also placed BG Energy Capital plc’s senior unsecured rating of ‘A’ and BG Energy Capital plc’s capital securities’ rating of ‘BBB+’ on RWN. The bonds issued by BG Energy Capital plc are guaranteed by BG, while capital securities are also guaranteed by BG, but on a subordinated basis. Additionally, the ‘F1’ ratings related to BG Energy Capital plc and BG Energy Finance Inc.’s commercial paper programmes guaranteed by BG, have also been placed on RWN. WHAT COULD TRIGGER A RATING ACTION? Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Expectations of through-the-cycle FFO-adjusted net leverage markedly exceeding 2.0x on a sustained basis. - Delays in key projects that significantly affect the likelihood of BG meeting its long-term production growth targets, and substantial cost increases for major projects. Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Fitch could remove the company from RWN if projected credit ratios were better than currently expected by the agency, for instance driven by a reduced capex plan. In the longer term a re-established track record of meeting production targets could lead to rating stabilisation.