Harbour Energy PLC Ratings Raised To 'BBB-' And Removed From CreditWatch On Wintershall Dea Acquisition; Outlook Stable
- On Sept. 3, 2024 Harbour Energy PLC announced the completion of its acquisition of substantially all of Wintershall Dea AG's upstream oil and gas assets for $11.2 billion. The group will take over Wintershall Dea's existing debt and fund the acquisition via equity ($4.15 billion) and cash ($2.15 billion). Ownership of the Harbour group, based on the total ordinary and non-voting shares held by LetterOne, will now be split between BASF (40%), LetterOne (15%), and other shareholders (45%).
- We believe this acquisition improves Harbour's business risk profile, with benefits including larger reserves, a longer reserve life (eight years), lower operating costs of $13 per barrel of oil equivalent (boe), and wider geographic diversification. We estimate the group's pro forma production at 485 thousands of barrels of oil equivalent per day (kboepd) and funds from operations (FFO) to debt at 40%-45% for 2025.
- We therefore raised our long-term issuer credit rating on Harbour Energy PLC to 'BBB-' from 'BB' and our issue rating on the $500 million senior unsecured notes to 'BBB-' from 'BB-'. We removed the ratings from CreditWatch with positive implications, where they were placed on Dec. 22, 2023.
- The stable outlook reflects our expectation that Harbour will maintain FFO to debt comfortably above our rating-commensurate level of 30%, supported by its financial policy.
LONDON (S&P Global Ratings) Sept. 5, 2024--S&P Global Ratings today took the rating actions listed above.
The acquisition of Wintershall Dea's non-Russian assets results in a much stronger business risk profile. The deal increases Harbour's pro forma production to 485 kboepd, compared with 186 kboepd before the transaction. It also raises the group's proved and probable (2P) reserves from 361 million of barrels of oil equivalent (mmboe) to 1.5 billion boe (bnboe).
Operating costs will be materially lower at $13 per boe, compared with $18 per boe before the acquisition. That said, its ability to flex costs, including both operating expenditure and capital expenditure (capex), may be limited because it will not operate most of the new assets. We therefore do not expect meaningful synergies from asset optimization, with cost synergies primarily from the centralization of administrative functions. The group will also benefit from the lower interest on Wintershall Dea's notes.
With this transaction, Harbour diversifies to Norway (36% of production), Argentina (12%), and other geographies. The group will also benefit from a wider geographic diversification and reduce its reliance on the U.K. (32%). Overall, we believe the combined business will be comparable to those of investment-grade rated peers, for example Var Energi ASA (BBB/Stable/--), Aker BP ASA (BBB/Stable/--), and Ovintiv Inc. (BBB-/Stable/A-3).
Reserve life remains a relative weakness compared with peers. Although this transaction lengthens Harbour's reserve life (2P reserves divided by annual production) to eight years from six years, its reserve life is below that of similar rated peers, which generally have reserve lives beyond 10 years. Harbour will therefore continue to develop its existing reserves and remain acquisitive. Absent such investments, reserve life could decline, potentially pressing our business risk profile assessment. We believe that higher-risk and lower-rated jurisdictions could play an increasing role in future acquisitions. After this acquisition, 20% of the group's reserves are in Argentina (CCC/Stable/C), which is characterized by fragile economic conditions and challenging transfer and convertibility opportunities.
Financial policy should support maintenance of FFO to debt of consistently above 30%. With pro forma FFO to debt expected at over 40% toward the end of 2024, Harbour has some headroom to withstand volatility in prices and increase returns to shareholders. In our base case, we forecast FFO to debt will remain between 40%-45% as long as oil prices are close to our assumptions ($80 Brent in 2025 and beyond). That said, FFO to debt could decline to or somewhat below 30% under our long-term Brent ($55/ boe) and title transfer facility (TTF; $8 per mmbtu) prices, requiring the company to adjust its shareholder remuneration or investments. The company's commitment to an investment-grade rating is an important part of its financial policy.
The stable outlook reflects our expectation that in the next 12 months, Harbour will focus on integrating the newly acquired assets, while maintaining FFO to debt of 40%-45%, supported by our oil and gas price assumptions and its financial policy.
We could lower our rating if FFO to debt declined below 30% for a long time due to a more aggressive financial policy or further debt-funded acquisitions or materially lower oil and gas prices.
Although unlikely in the near term, we may consider an upgrade if:
- The company profitably and materially expanded its business, including production and reserves; or
- FFO to debt moved above 45% on a sustainable basis (even at a Brent crude oil price of $55 per barrel), with clarity on the capital allocation priorities.
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- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
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- Criteria | Corporates | Industrials: Revised Assumptions For Assigning Recovery Ratings To The Debt Of Oil And Gas Exploration And Production Companies, Sept. 14, 2012
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