Fitch Ratings has affirmed Dolphin Energy Limited’s (DEL) existing and proposed new senior secured bonds approximately size of over $3billion.
Existing $1.250 billion 5.888% secured bonds due 15 June 2019 is affirmed at ‘A+’ with outlook stable.
Proposed new secured bonds of up to $1.930billion due 2021-2031 is affirmed at ‘A+ (exp)’ with outlook stable.
DEL announced its intention to issue the proposed new bonds in July 2011 but has chosen to delay issuance due to credit market volatility.
Should issuance continue to be delayed, Fitch said it would withdraw the expected ratings on the proposed bonds in line with its policies.
The ratings and Outlooks are supported by DEL’s position as a key long-term, low-cost gas supplier to the UAE in the context of the growing gas deficit in Abu Dhabi and Dubai. This importance is reflected in the Abu Dhabi governments 51% covenanted shareholding in DEL through Mubadala Development Company.
The core commercial strength of the project is the existence of long-term fixed-price sales contracts for the vast majority of the gas. These contracts, the cost recovery and revenue sharing terms in the upstream production contract and fixed pipeline capacity payments provide a significant cushion against market risk. DEL’s medium-term oil breakeven level in the weakest year is low at around $11/barrel in Fitch’s base case.
The project has been fully operational since April 2008 and has performed to the sponsor’s expectations and above Fitch’s base case. The technical adviser is comfortable with the operating performance and, whilst the issue of corrosion in one of the offshore upstream pipelines persists, considers that DEL is managing the situation prudently and that the worst case scenario would have only a modest impact. The remaining onshore pipeline in the UAE is now operational thus completing DEL’s network.
DEL experienced technical problems with its two sulphur recovery units (SRU) in Q211 due to condenser failures. This had only a modest, temporary impact on production. Modifications have been made which allowed DEL to quickly return to full production and, if necessary, would enable the processing plant to operate at full capacity using only one SRU. No impact is anticipated on total 2011 production. Plans to further change the SRU design are being developed and are likely to be implemented within the next six months. These are unlikely to have a material cost.
DEL’s financial performance has been strong, driven by high oil prices, additional third-party gas volumes and good operating cost control. The actual DSCR for 2010 was 3.23x compared to 2.41x in Fitch’s base case.
The proposed bonds are expected to be mostly bullet maturities, although some may also be issued in fully amortising form. Overall, the bonds would raise net additional debt, net of bank loan repayment, of up to $1.131billion; although at this level the aggregate drawn debt amount would be only $7million higher than was committed at the original refinancing in July 2009 due to the significant amortisation to date. The average DSCR in Fitch’s base case is forecast to be around 25 basis points higher between 2012 and 2019 due to lower amortisation in this period. Refinancing risk on the proposed bullet bonds and associated shareholder debt is adequately mitigated by the introduction of a sinking fund, which would fully repay the bullet amounts in Fitch’s base case and cover around 60% in Fitch’s stress case.
DEL plans to drill three additional wells if required to extend the production plateau from 2027 to 2032. These are considered low risk by the reserve consultant and will produce from proved reserves. The proposed extension of the repayment period more closely matches the economic life of the project. Any refinancing of the bullet bonds should be able to be comfortably amortised by 2027 thus giving an effective tail of five years on the plateau production profile, upstream production contract and gas sales contracts.
“The ratings are constrained by the single site nature of its DEL’s processing facilities in Ras Laffan, and by the single subsea export pipeline and receiving facilities. DEL’s ratings would come under downward pressure should there be major operating problems at Ras Laffan, a material reduction in the length of the production plateau or a reduction in the credit quality of Abu Dhabi or Qatar,” Fitch in a statement added.
DEL operates a large oil and gas project extracting gas from offshore fields in Qatar, processing it at Ras Laffan in Qatar and then exporting around two billion cubic feet a day of clean gas via a 364 km subsea pipeline to Abu Dhabi for onward sale in the UAE and Oman, mostly under long-term contracts. The project also produces a significant amount of condensate and liquefied petroleum gas which are by-products of the gas processing. The project has been fully operational since April 2008.