(Fitch, 29.Sep.2021) — Fitch Ratings has placed the ratings for Hunt Oil Company of Peru L.L.C., Sucursal del Peru’s (HOCP) on Rating Watch Negative (RWN), including the ‘BBB’ Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) and the ‘BBB’ USD600 million senior unsecured notes due 2028.
The RWN reflects HOCP’s heightened regulatory and political risk from the Peruvian government’s recent request to renegotiate the Camisea Consortium’s license agreement. HOCP has a 25.2% stake in the consortium, which manages Peru’s largest natural gas producing fields. Fitch estimates that 30% to 35% of HOCP’s revenues are exposed to a potential amendment of the agreement to the company’s ability to export. Fitch expects to resolve the RWN in six months or longer once there is greater clarity on the outcome of a potential new license agreement and its impact on HOCP’s credit profile.
Key Rating Drivers
Heightened Regulatory Risk: Fitch believes HOCP’s cash flow profile may be adversely impacted by a material change in the Camisea Consortium’s licensing agreement and by a potential regulatory ruling that could limit the company’s ability to export, which represents between 30% and 35% of HOCP`s revenues. Fitch estimates that HOCP’s natural gas liquids (NGL) business segment, almost evenly distributed in naphtha (exports) and LPG (domestic consumption), represents 70% of its USD353 million EBITDA in fiscal year 2021. Camisea represents 90% of the country’s total proved reserves of natural gas and 91% of total proved reserves of NGL. Nearly 85% of the natural gas in Peru comes from Camisea.
Strong Capital Structure: HOCP maintains strong credit metrics. As of December 2020, total debt to EBITDA reached 2.7x, slightly higher compared with 2.2x registered during 2019. Per Fitch’s Oil & Gas price deck, going forward, HOCP’s leverage is expected to reach 1.6x during 2021 and will remain around 2.0x over the rating horizon. The company reported low leverage when measured by total debt to proven reserves (HOCP’s participation), of approximately USD1.4 per boe, sizable reserves, and stable production levels. These factors, plus its dominant domestic market share, allow the company to generate consistently strong cash flows from operations and meet its obligations in a timely manner.
Competitive Cost Structure: HOCP’s lifting costs are below USD6/boe, which is firmly in the lower end of the spectrum compared with its peers in Latin America (average lifting cost of USD9/boe). Considering full production costs after paying royalties, full-cycle costs has gradually decreased from USD17 per boe recorded in 2013 to an average of USD12 per boe for the past three years, mainly attributable to lower royalties paid to the government as a result of lower international commodity prices.
Robust Operating Metrics: HOCP’s operating metrics are strong for the rating category. Camisea’s reserve life is estimated to extend for more than 25 years; however, the license agreements for the development of blocks 88 and 56 expire in 2040 and 2044, respectively. As of December 2020, Camisea’s proved reserves for blocks 88 and 56 amounted to 7.8 TCF (approximately 1,390 boe) of natural gas and 404 MMbbl of NGLs. Fitch expects Camisea’s gross production during 2021 for blocks 88 and 56 approximately 58 million boe of natural gas and 25 million boe of NGL and liquids. Fitch anticipates production levels to reach pre-pandemic levels by the end of 2020, with stable for the past few years and have significantly increased since the Camisea field started producing.
Manageable Capex Plan: Significant amounts of capex have already been invested to develop blocks 56 and 88. During 2008-2014, HOCP’s 25.2% share invested in the Camisea consortium was approximately USD524 million in FD&A, mainly used to increase the reserves of blocks 56 and 88. Investments in 2016-2020 were nominal, and Fitch expects HOCP’s share on capex (related primarily to investments in compression equipment) to reach approximately USD100 million during 2021-2024.
Given the size of the reserves, the characteristics of the field reflected in the richness of the land with a relatively low decline rate, and the sub-exploitation of the wells, no significant capex is required to maintain Camisea’s reserve life and production levels. Capex will be allocated to increase the pressure in the wells through gas compressors to smooth the natural decline rate of the existing wells. Fitch anticipates annual capex between USD25 million and USD30 million during 2021-2024, concentrated in maintenance, compression systems and safety.
Weak Linkage with Parent Company: Although HOCP’s ratings are based on its individual credit risk profile, the analysis considers a weak legal and operational link to its parent company Hunt Oil Consolidated, Inc., which controls 100% of HOCP. As part of the Camisea Consortium, HOCP has no direct impact on the decision-making process, due to the fact that all decisions are taken as a consortium. In addition, HOCP has to comply with a debt service coverage ratio (DSCR) above 1.3x on a quarterly basis in order to distribute dividends to its shareholder.
Derivation Summary
HOCP’s rating relative to peers is supported principally by its strong asset base and manageable investment requirements (approximately 11% of cumulative EBITDA over the past three years). Although more levered than its regional peers, HOCP’s capital structure is expected to remain below 2.5x over the rating horizon. By comparison, Fitch estimates investment requirements for Ecopetrol (BB+/Stable) of around 50% of annual EBITDA during the same period and leverage consistently below 2.0x. Fitch expects GeoPark Ltd (B+/Stable) to deleverage below 3.0x over the rating horizon. Fitch expects Canacol Energy Ltd (BB-/Positive) to remain below 1.5x in the medium term.
HOCP’s 25.2% share of the Camisea reserves combined with its single-asset exposure puts its asset risk profile in line with the ‘B’ and ‘BB’ categories. In this respect, it fares poorly relative to Tecpetrol International S.L. (BB/Stable), both of which have assets throughout Latin America, including, in Tecpetrol SL’s case, a 10% share in the Camisea fields. However, this is mitigated by Camisea’s abundant reserves of approximately 13 TCF of wet gas and a reserve life of approximately 20 years. By comparison, Geopark and Canacol both reported around 10 years of reserves at the end of 2020, with significant investment requirements expected to maintain those reserve levels.
Key Assumptions
–Liquid prices linked to Fitch’s WTI price deck at $60 per bbl during 2021, $52 per bbl in 2022, and $50 per bbl in the long term;
–Natural gas exports linked to Fitch’s price deck for Henry-Hub (HH) at $3.40 per MMbtu in 2021 and $2.45 per MMbtu going forward, while National Balance Point (NBP) at $10.0 per MMbtu in 2021, $6.0 per MMbtu in 2022 and $5.0 per MMbtu during 2022;
–Domestic natural gas price assumptions at $1.95 per MMbtu over the rating horizon;
–Annual liquid production from blocks 56 and 88 averaging 25,000 Mbbl, with 55% concentrated in LPG (Propane and Butane), 40% concentrated in naphtha and the remaining portion allocated to MDBS;
–Natural gas domestic sales in the range of 268 (BCF) during 2021;
–Annual capex between USD25 and USD30 million annually, concentrated in maintenance, compression systems and safety projects, during 2021-2024;
–Dividend pay-outs adjusted to leave a cash position of approximately USD35 million.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch will resolve the RWN once we can assess the outcome of a potential change to Camisea’s license agreement and how it will impact HOCP’s revenues, production, liquidity and capital structure. We may affirm the rating if the company maintains its licenses without major deviations from the original terms and if HOCP’s total debt to EBITDA remains around 2.5x for a sustained period. It may take more than six months to resolve the RWN.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–Steep decrease in crude oil prices coupled with a significant deterioration in production levels and natural gas and NGL demand.
–Leverage increasing on a sustained basis above 3.0x and/or debt service coverage falling below 2.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: HOCP presents an adequate liquidity position to be able to support its ongoing capex requirements. Its liquidity position is supported by healthy cash flow generation and cash on hand of USD69 million as of June 2021, which compares favorably with short-term debt of USD25 million. HOCP has been able to cover all cash costs called from the Camisea operator without incurring in additional indebtedness. The company’s amortization schedule is manageable, as the notes start amortizing by the end of 2021. The company’s liquidity is further buoyed by an undrawn committed credit line facility of USD30 million.
Issuer Profile
HOCP is part of the Camisea Consortium. It holds a 25.2% interest in the license contracts related to Peru’s largest natural gas producing fields, the Camisea Fields, which include Block 88 and Block 56. Hunt Consolidated Inc owns 100% of HOCP’s shares.
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