Fitch assigns Dolphin Energy's bonds 'A+(exp)' rating

Fitch Ratings has assigned Dolphin Energy Limited's (DEL) proposed new senior secured bonds of up to $1,804 million 'A+(exp)' expected ratings. The outlook is Stable.

The ratings and outlook 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 government's 51 per cent 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.

The project has been fully operational since April 2008 and has performed broadly within the sponsor's expectations and above Fitch's base case. 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) during 2011. This had only a modest, temporary impact on production.

Fitch understands that a failure analysis has been undertaken by DEL and the remedial actions identified have been partly implemented with the remainder of such remedial actions to be completed in Q112. Comfort is gained from DEL's ability, if necessary, to operate at full capacity with one unit while remediation works are undertaken simultaneously on the other SRU.

Financial performance has been strong, driven by high oil prices, additional third-party gas volumes and good operating cost control. The actual DSCR was 3.28x in December 2011 and 3.23x in December 2010 compared to 2.41x in Fitch's base case. The bonds are expected to be mostly bullet maturities, although some may also be issued in fully amortising form. The ultimate size of the bonds may vary but will not exceed $1,804m.

At this level, the bonds would raise net additional debt, after refinancing existing loan facilities, of up to $969m. The average DSCR in Fitch's base case is forecast to be around 36 basis points higher between 2012 and 2019 due to lower amortisation in this period.

Refinancing risk on the 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 77 per cent 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 -DEL's processing facilities in Ras Laffan, and by the single subsea export pipeline and receiving facilities. In addition, DEL's liquids production is fully exported through the Strait of Hormuz. Fitch considers a blockade of the shipping of hydrocarbons through the Strait unlikely.

However, should such an event occur, the project's operations would be negatively affected as production would be curtailed until shipping routes are restored. Under this scenario, the debt service reserve would allow DEL to meet debt service payments for at least six months.

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.

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 2 billion cubic feet a day of clean gas via a 364 kilometre 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.