Fitch Ratings has affirmed ADNOC Murban RSC LTD’s (ADNOC Murban) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘AA’ with a Stable Outlook.
ADNOC Murban’s ratings reflects its overall strong ties with its 100% parent, Abu Dhabi National Oil Company (ADNOC), and our assessment of the strong linkage between ADNOC and its sole shareholder, Abu Dhabi (AA/Stable).
ADNOC Murban is set to become ADNOC’s central debt-capital market funding vehicle. Fitch assumes the company could raise up to USD10 billion in the next few years. Based on contractual agreements with the group, ADNOC Murban’s cash flow will be more than sufficient to service debt it may raise, even under very conservative oil prices.
Key Rating Drivers
Group’s Primary Borrower: ADNOC Murban’s purpose is to be ADNOC’s primary debt capital market borrower for attracting funding in the bond market. Unlike traditional financial companies, its debt will not be guaranteed by the parent but the company will generate sufficient cash flows to service its debt, due to its rights over assigned volumes of Murban oil produced by ADNOC. Murban oil is Abu Dhabi’s flagship oil grade sourced from onshore concessions.
Credit Links to Parent: We believe that ADNOC Murban’s credit profile will be closely linked to that of ADNOC. The parent will continue to operate as an oil producer and concession holder, and will incur opex, capex, tax and royalties associated with the production of Murban oil.
Strong Ties with Parent: ADNOC Murban’s ratings reflects its overall strong ties with its 100% parent ADNOC and our assessment of the strong linkage between ADNOC and its sole shareholder, Abu Dhabi. Our credit assessment of ADNOC includes its strong ties with Abu Dhabi, its high upstream production capacity and vast hydrocarbon reserves, very low cost of production, integration into downstream operations, and low leverage.
Ownership of Murban Oil: ADNOC Murban has been assigned rights to receive 1 million barrels of oil per day (mmbpd) of ADNOC’s share of Murban crude oil produced by the group’s operating companies over 30 years (with possible additional volumes of Murban oil at ADNOC’s discretion). We view ADNOC Murban’s oil entitlement of 1mmbpd constitutes a significant share of ADNOC’s oil production capacity (equating to about 20-25% of the parent’s total onshore and offshore oil production capacity).
ADNOC Murban’s cash flows will be supported by the parent’s volume availability commitment to provide no less than 1mmbpd of Murban crude oil, or a cash settlement of equivalent value from ADNOC in case of lower physical volumes.
Substantial Cash Flows: We estimate that at Brent crude of USD60/bbl, the company’s annual EBITDA will be approximately USD23 billion. ADNOC Murban will be exempt from the oil production tax and royalties (these will remain with ADNOC) and the company will not incur any capex or material opex. ADNOC Murban’s excess cash flows will be channelled back to ADNOC through dividends or repayment of capital contribution to the parent as determined by ADNOC Murban’s board. However, they will effectively be subordinated to ADNOC Murban’s debt obligations.
Conservative Leverage: Fitch expects ADNOC Murban’s leverage to be low. Assuming the company raises USD10 billion in debt over the next three years, its EBITDA gross leverage should remain comfortably below 1x. We project conservative interest coverage at 40x or more over the forecast horizon to 2026.
Resilient to Severe Stress: We estimate that ADNOC Murban will generate enough cash flows to service interest on its projected debt, even if oil prices fall to USD1/bbl. At USD20/bbl, it should generate enough cash flow to repay up to USD7 billion of principal in a year. As a result, Fitch believes that ADNOC Murban is unlikely to require any support from the parent or Abu Dhabi to service its debt.
High Strategic, Operational Incentive: ADNOC Murban has been created as an integral part of ADNOC and we believe the latter’s incentive to support ADNOC Murban is high overall. In particular, we view the strategic incentive as high, given ADNOC Murban benefits from a 30-year firm volume availability commitment from ADNOC with a cash settlement backstop mechanism to further mitigate volume risk, as well as a 30-year offtake agreement from ADNOC and ADNOC ‘s trading arm, contractually guaranteeing a robust base of long-term cash-flow generation.
We consider the 1mmbpd volume commitment as significant to ADNOC, equating to around 20-25% of total onshore and offshore production capacity. The operational incentive is also high, given overlapping management and ADNOC Murban’s integration within the group’s operations.
Medium Legal Incentive: Fitch views the legal incentive as medium, given a lack of financial guarantees from ADNOC or Abu Dhabi. However, ADNOC Murban’s cash-flow generation and ability to service debt is supported by ADNOC’s 30-year legally binding volume availability commitment of 1mmbpd, a cash settlement backstop mechanism to further mitigate volume risk, as well as a 30-year offtake agreement from ADNOC and ADNOC’s trading arm.
ADNOC’s Bonds: ADNOC’s USD1.195 billion exchangeable bonds due 2024 represent senior unsecured obligations of ADNOC and their rating is in line with our view of ADNOC’s credit profile, which is based on its close links with Abu Dhabi.
Source: Fitch Ratings