S&P Global Ratings says the declaration of force majeure on some LNG import cargoes by China National Offshore Oil Corp. (CNOOC, A+/Stable/–) will not affect the ratings on the company or Australian LNG exporters.
CNOOC has declared force majeure on some LNG cargoes by Royal Dutch Shell PLC, Total S.A., and Petroliam Nasional Bhd. S&P says it believes this is due to weak downstream demand and full capacity at ports, largely because of the novel coronavirus outbreak in China.
S&P forecasts that the force majeure is likely to be short-lived. The number of cargoes affected should be insignificant compared with CNOOC’s annual import of about 30 million tons. These LNG sellers are not accepting CNOOC’s force majeure, according to news reports.
However, S&P says it expects both sides to go through negotiations before arbitration. CNOOC is primarily an upstream player and the LNG business is only a small portion of its portfolio. Therefore, any potential compensation is unlikely to affect the company’s credit metrics.
The immediate credit impact of the CNOOC force majeure on Australian LNG exporters–Woodside Petroleum Ltd.(BBB+/Stable/–), Santos Ltd. (BBB-/Stable/A-3), and Origin Energy Ltd. (BBB/Stable/A-2)–is likely to be muted. Origin has an indirect exposure in the form of dividends it receives from its 37.5% ownership in the Australia Pacific LNG (APLNG).
No Australian agreements have so far had force majeure clauses invoked. The predominant exposures of Woodside and Santos are through medium-to-long-term agreements with customers based in Japan, Korea, and Malaysia, while Origin has ties with China Petrochemical Corp. (A+/Stable/–).
In S&P’s view, the key risks to the financial profiles of Woodside and Santos would likely stem from a prolonged weakness in oil prices, given their predominant exposures to oil-linked LNG contracts. While this is also true for APLNG–and therefore indirectly for Origin–the impact on Origin would be tempered by the hedging it does at the corporate level. The disparity between LNG spot prices and long-term oil-linked contracts places additional pressure on long-term LNG contracting and re-contracting at this point in the cycle.
S&P says it also seesa downside risk for Australian LNG exporters from their direct exposure to the spot LNG market. This is given the current LNG supply glut and the flow-on risk of excess cargoes being diverted into the spot market.
“We forecast Woodside has the greatest spot exposure, at about 20% of its volumes, while Santos’ and Origin’s spot exposures (through its ownership of APLNG) are modest, at about 5% or less,” S&P stated.
“Nevertheless, we believe these Australian companies have built moderate rating buffers in recent years and can withstand near-term volatility in oil prices and cash flow.”