WARSAW: Fitch Ratings has upgraded QatarEnergy's (QE) Long-Term Issuer Default Rating (IDR) to 'AA' from 'AA-'. The outlook is stable.
The upgrade reflects a recent similar sovereign rating action on Qatar (AA/Stable). This is because QE's 'AA' rating is constrained by that of its sole shareholder - Qatar - given strong links between the company and the sovereign, in line with Fitch's Government-Related Entities (GRE) and Parent and Subsidiary Linkage (PSL) Rating Criteria.
QE's support score under Fitch's GRE Rating Criteria amounts to 55 out of a maximum 60, highlighting the company's strategic importance to the government. We assess QE's Standalone Credit Profile (SCP) at 'aa+', bolstered by its significant liquefied natural gas (LNG) operations, competitive production costs, an extensive reserve base, and its prudent financial leverage.
Key constraints include completion risk for large capex projects related to an increase in LNG production, and political risk.
Key rating drivers
'Very Strong' Decision-Making, Oversight:Our assessment reflects QE's full government ownership and the presence of senior government officials on its Board of Directors (BoD), underscoring the high level of influence and strategic oversight by the state. QE operates with a clear mandate to support the sovereign's broader economic objectives, as underlined by its alignment with the national strategic vision and execution of projects that are of significant importance to Qatar's economy.
'Strong' Precedents of Support:QE operates with low leverage, which underscores its strong financial discipline that is aligned with the government's strategic objectives. Its discretionary dividend policy further underscores the state's indirect support, easing QE's funding costs. This approach mirrors a broader Middle Eastern government's history of facilitating debt financing for state entities, which underpins our 'Strong' assessment. While QE does not need state support due to its strong financial profile, we believe the willingness to support is strong, given QE's strategic importance.
'Very Strong' Government Policy Role:Fitch views the preservation of the government policy role for QE as 'Very Strong' due to the pivotal economic role it plays in Qatar. As the national oil company, QE significantly contributes to the government's revenue. A default of QE would lead to the loss of irreplaceable valuable assets. Furthermore, we believe that supporting QE ensures a meaningful net benefit to the economy over the medium-to-long term.
'Very Strong' Contagion Risk:Fitch views QE as a proxy issuer for the Qatari government. A QE default would, in our opinion, significantly impede financing for the Qatari sovereign and GREs.
Extension of PlannedLNG Expansion:QE has recently announced a plan to increase LNG production capacity by 2030 to 142mtpa, from its 126mtpa planned earlier and the current capacity of 77mtpa. Details on the capex and associated funding are yet to be announced, but we assume QE should be able to maintain its strong financial profile given its scale of operations and low leverage to be maintained at least until 2026, the end of our current forecast period.
New LNG Capacity Progressing:QE is in the process of expanding LNG production capacity to 126mtpa by 2028, as announced earlier. The investments will be funded by proceeds from its 2021 bond issue, operating cash flows and contributions by partners. QE has entered into partnership agreements for the LNG projects with major global oil and gas companies and awarded engineering, procurement and construction (EPC) contracts.
International Expansion Enhances Diversification:Internationally, QE continues to diversify through strategic projects, including the Golden Pass LNG venture and the USGCII Petrochemicals Project in the US and Sépia oil field in Brazil. We view spending for its international expansion as manageable for QE, while the associated improved geographical diversification is positive for its business profile.
Contracted Volumes, Oil-Linked Pricing:Qatar sells around 80% of LNG under long-term contracts (five or more years). A similar portion of total output is linked to oil prices (Brent and Japan customs cleared crude), which has overall been positive for QE in recent years. Short-term sales are via agreements with a duration of one-to-three years. A large portion of contracted volumes supports the stability of QE's cash flow.
We see long-term uncertainty in oil demand as energy transition gathers pace, which may adversely affect prices. We assume that as trading volumes on global gas hubs increase further, LNG pricing may gradually move towards natural gas spot prices or a hybrid model.
Climate Change Mitigation:QE is actively addressing climate change by committing to reduce operational emissions, enhance energy efficiency, and decrease methane emissions, with the aim to eliminate routine flaring within the decade. QE is also working towards establishing 2GW-4GW of renewable electricity generation capacity by 2030 and intends to utilise carbon capture and storage techniques for remaining emissions, targeting a reduction of net carbon intensity by 25%-35% by 2035.
Although QE faces greater risks associated with the transition to cleaner energy than European oil majors, its advantageous position in natural gas and low production costs, along with its strategic efforts to counteract these risks, serve to alleviate its vulnerability.
Derivation summary
QE's (AA/Stable) 'aa+' SCP is equal to that of Saudi Arabian Oil Company (Saudi Aramco; A+/Stable; SCP: aa+). It takes into account QE's high production, large natural gas reserves, low production costs, leading position in the global LNG market and strong financial profile. Saudi Aramco's upstream liquids production in 2022 and total hydrocarbon production averaged 11.5MMbpd and 13.6MMboepd, respectively, well ahead of the upstream output of global integrated producers, such as Shell, TotalEnergies and BP.
Key assumptions
- Oil and gas prices to 2026 in line with our base-case price deck
- Production increasing to 1.8 million barrels of oil equivalent per day by 2026 as expansion projects ramp up
- Capex of around QR30bn per annum by 2026
- Dividends at between QR55bn and QR125bn per annum between 2023 and 2026
