London, May 13, 2022 -- Moody's Investors Service (Moody's) has today upgraded the long-term issuer rating and the senior unsecured ratings of Aker BP ASA (Aker BP, or the company) to Baa2 from Baa3 rating on review for upgrade. Concurrently, Moody's has changed the outlook to stable from ratings under review.
This concludes the review for upgrade initiated by Moody's on 14th January 2022. Upon the successful consummation of the transaction, Moody's expects to align the rating of the unsecured bonds issued by Lundin Energy Finance B.V. (senior unsecured currently Baa3 on review for upgrade) with those issued by Aker BP.
A full list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
Today's rating action reflects Moody's expectation that the combination between Aker BP and the oil and gas operations of Lundin Energy AB (Lundin Energy, Baa3 stable) will successfully conclude as planned by 30th June 2022. The rating agency considers that the risk of the transaction not concluding is very low. Moody's view is supported by Aker BP's receipt of all necessary approvals to conclude the transaction, alongside the associated reduced funding risk given the company's intention to fund the $2.22 billion consideration out of cash flow generation.
Today's rating upgrade also reflects Moody's expectation of continued adherence to a conservative financial policy and capital allocation framework in line with that of Aker BP standalone. In Moody's view, the company's intention to fund the acquisition of Lundin Energy's assets with a combination of cash and equity further substantiates Aker BP's strong track record of abiding by its financial policy commitments. Moody's also notes Aker BP's approach to shareholder remuneration consisting of a progressive dividend policy along with special dividends or share buy-backs at times of high Brent oil prices, serving as a way for the company to reward shareholders in times of strong commodity prices without committing to a higher dividend level on a permanent basis.
Finally, the Baa2 rating reflects Aker BP's pro-forma enhanced business profile and profitability, along with projected strong financial metrics even in a $50 - $70/barrel Brent price environment. At the same time, the combined company's credit quality is constrained by (i) a smaller scale compared to similarly rated E&P companies, (ii) the operational concentration on the Norwegian Continental Shelf, as well as a degree of concentration around a restricted number of producing hubs (iii) the generally high operational risks associated with offshore hydrocarbon development and production activities and (iv) rising outflows for growth investments and dividends in the medium term.
While industry cycles will continue to influence Aker BP's financial performance, Moody's projects future profitability and cash flow generation for the broader exploration and production sector to be impacted longer term, as a result of global initiatives to limit adverse impacts of climate change will constrain the use of hydrocarbons and accelerate the shift to less environmentally damaging energy sources. However, Moody's expects this shift to occur over a period of decades and that global oil demand will continue to grow through at least the latter half of the 2030's.
ESG CONSIDERATIONS
Environmental considerations incorporated into Aker BP's ratings primarily relate to increasing regulatory risks faced by upstream companies as the world moves towards cleaner energy mix, particularly with respect to carbon emissions. Aker BP's pro-forma enlarged interest in the Johan Sverdrup field (CO2 emission of below 1 kg/boe) combined with the company's already competitive carbon emission footprint (CO2 emissions of 4.8kg/boe reported in 2021) would result in an asset portfolio with an scope 1 and 2 emission intensity well below the industry average, partially mitigating the very high environmental risk associated with upstream operations in the context of the energy transition. Moody's also expects only a moderate increase in the quantum of Aker BP's decommissioning liabilities, owing to the relatively young age of Lundin Energy's acquired assets. Despite the significant uncertainties relating to the estimated costs for decommissioning, Moody's does not expect costs associated with asset retirement obligations to have a significant adverse effect on the group's operating and financial performance in the next few years.
Governance considerations were a key driver of this rating action. They include Moody's expectation that Aker BP will continue to operate within the boundaries of its conservative financial policy and capital allocation framework, which includes prioritization of balance sheet strength over shareholder remuneration. Moody's expect the company to operate within its target maximum Net Debt to EBITDAX of 1.5x and to switch off dividend increases if oil prices fall below $40 per barrel.
LIQUIDITY
Aker BP has an excellent liquidity position. As at 31st March 2021, the company reported $2.8 billion of cash and cash equivalents and access to a fully undrawn $3.4 billion revolving credit facility (RCF). The RCF comprises a $1.4 billion working capital facility due in 2025 and a $2 billion liquidity facility due in 2026. The RCF is subject to a 3.5x net leverage covenant and to a 3.5x interest coverage, under which the company has substantial capacity. The next bond maturity event is a $500 million bond falling due in January 2025.
RATINGS OUTLOOK
The stable outlook assumes a successful completion of the combination of Aker BP and Lundin Energy's oil and gas operations, with the resulting entity having larger scale, low production cost structure, and a rich pipeline of growth projects. The stable outlook also reflects Moody's expectation of continued adherence to a conservative financial policy aligned to that of Aker BP. This should allow the group to gradually grow its production and operating cash flows while maintaining low leverage and strong cash flow coverage metrics.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
While unlikely in the near to medium term, the rating could be upgraded if Aker BP: (i) increase its average daily hydrocarbon production towards 650 kboepd, while maintaining a reserve replacement rate of no less than 100%; (ii) pursue financial policies which ensure that adjusted RCF to total debt is maintained sustainedly above 75% in a $55/barrel Brent oil price and (iii) generates consistent positive FCF amidst a constant need to access and develop new hydrocarbon resources. The rating upgrade would also require the company to continue to demonstrate strong financial discipline by balancing shareholder and creditor interests.
The rating could be downgraded to Baa3 if: (i) average production falls below 400 kboepd on a sustained basis or reserve replacement falls considerably below 100%; (ii) Aker BP's financial profile materially deteriorates and net adjusted leverage increased sustainably above 1.25x or (iii) adjusted RCF to total debt fall below 50% for an extended period of time. The rating could also be downgraded should Aker BP's liquidity profile significantly weaken or if FCF generation turned sustainedly negative.
LIST OF AFFECTED RATINGS
Upgrades, previously placed on review for upgrade:
..Issuer: Aker BP ASA
....LT Issuer Rating, Upgraded to Baa2 from Baa3
....Senior Unsecured Medium-Term Note Program, Upgraded to (P)Baa2 from (P)Baa3
....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3
Outlook Actions:
..Issuer: Aker BP ASA
....Outlook, Changed To Stable From Ratings Under Review
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Independent Exploration and Production published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1284973. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
COMPANY PROFILE
Aker BP is a Norwegian oil and gas company primarily involved in the exploration, development and production of petroleum resources on the Norwegian Continental Shelf, where all of its producing assets are located. In the Last Twelve Months ended 31st March 2022 the company generated revenue of $6.8 billion from a net average daily hydrocarbon production of 206 kboepd.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Maria Chiara Caviggioli
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
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