Fitch Ratings has revised QatarEnergy's (QE) Outlook to Positive from Stable, while affirming its Long-Term Issuer Default Rating (IDR) at 'AA-'.

The Outlook revision on QE reflects a similar sovereign rating action on Qatar (AA-/Positive). This is because QE's 'AA-' rating is constrained by that of sole shareholder - Qatar - given strong links between the company and the sovereign, in line with Fitch's Government-Related Entities (GRE) and Parent and Subsidiary Linkage (PSL) Rating Criteria.

Fitch assesses the Standalone Credit Profile (SCP) of QE at 'aa+', which is supported by the large scale of its liquefied natural gas (LNG) franchise, low production costs, large reserve base and conservative leverage. While focused on a single country, its operations are predominantly gas, which makes it better placed for energy transition than other oil and gas majors.

Key constraints include completion risk for large capex projects related to an increase in LNG production, and political risk.

Key Rating Drivers

Sovereign Constrains Rating: QE's rating is constrained by that of Qatar in accordance with Fitch's GRE and PSL Rating Criteria. This reflects the influence the state, QE's 100% owner, exerts on the company through strategic direction, taxation and dividends. QE's 'aa+' SCP is contingent on the company's ability to maintain funds from operations (FFO) net leverage at below 1x through the cycle.

Strong Relations with Government: QE has no near-term privatisation plans. The board of directors currently includes the deputy Emir of Qatar, two government ministers, and the company's president and CEO is the Minister of Energy Affairs. We therefore view status, ownership and control as 'Very Strong'. Given QE's robust financial and operational profile, no government support has been required thus far, but we expect support to be forthcoming, given the pivotal role QE plays within Qatar's infrastructure and economy, resulting in a 'Strong' score for the support track-record factor.

High Systemic Importance: We view socio-political implications of default as 'Very Strong' and financial implications of default as 'Strong'. This is due to QE being an investor in and a primary driver of the oil-and-gas value chain of Qatar, as well as being a major contributor to government revenue. QE's output also powers domestic power and water generation, and serves as feedstock for domestic refining, chemicals, and metals production. This results in an overall support score under Fitch's GRE Rating Criteria of 45 points out of a maximum 60, which along with the 'aa+' SCP, leads to the rating being constrained by the sovereign's.

LNG Expansion Progressing: QE plans to expand its LNG production capacity to 126mtpa by 2028, from 77mtpa currently. The investments will be funded by proceeds from its 2021 bond issuance, operating cash flows and contributions by partners. QE has already entered into partnership agreements for the LNG projects with major global oil and gas companies and awarded engineering, procurement and construction (EPC) contracts.

International Expansion Continued: QE owns 70% of the Golden Pass LNG project (16mtpa) in Texas, which will start production in 2024. QE and Chevron Phillips Chemical Company (CPChem) took a final investment decision on United States Gulf Coast II (USGCII) Petrochemicals Project in November 2022, an USD8.5 billion integrated polymers facility. In April 2022, QE entered into a production-sharing agreement with the Brazilian government for surplus volume rights of the Sepia oil field. We view spending for its international expansion as manageable for QE, while the improved geographical diversification is positive for its business profile.

Contracted Volumes, Oil-Linked Pricing: Qatar sells around 80% of LNG under long-term contracts (five or more years). A similar portion of total output is linked to oil prices (Brent and Japan customs cleared crude), which has overall been positive for QE in recent years. Short-term sales are via agreements with a duration of one-to-three years. A large portion of contracted volumes supports the stability of QE's cash flow. We see long-term uncertainty in oil demand as energy transition gathers pace, which may adversely affect prices. We assume that as trading volumes on global gas hubs increase further, LNG pricing may gradually move towards natural gas spot prices or a hybrid model.

Derivation Summary

QE's SCP of 'aa+' is equal to that of Saudi Arabian Oil Company (A/Positive). It considers QE's high production, large natural gas reserves, low production costs, leading position in the global LNG market and its strong financial profile.

QE's ratings are constrained by those of Qatar due to our assessment of strong linkage between the company and the sovereign. Similarly to QE's, the ratings of Saudi Aramco are constrained by its relevant sovereign's.

Key Assumptions

Key Assumptions for our Rating Case for the Issuer:

Oil & gas prices to 2026 in line with our base case price deck

Production increasing to 1.8 million barrels of oil equivalent per day by 2026 as expansion projects ramp up

Capex of around QAR30 billion per annum by 2026

Dividends between QAR55 billion and QAR125 billion per annum between 2023 and 2026

RATING SENSITIVITIES

QE

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action on Qatar

An upward revision of the SCP is unlikely given the inherent volatility of the oil and gas industry and QE's upstream production concentration in a single country

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The rating is on Positive Outlook therefore negative rating action is unlikely. However, the revision of the sovereign Outlook to Stable would be replicated for QE.

Negative rating action on Qatar would lead to negative rating action for QE.

FFO or EBITDA net leverage rising to above 1x on a sustained basis (excluding JVs and/or based on proportionate consolidation basis) due to, for example, much higher-than-expected capex, which may be negative for the SCP but not necessarily for the IDR

Qatar

Factors that could, individually or collectively, lead to negative rating action/downgrade:

External Finances: A deterioration in Qatar's external balance sheet, for example, due to renewed increases in net external debt, pressure on non-resident funding for banks requiring liquidity injections by the sovereign, or signs of sustained unfavourable investment returns on sovereign assets

Public Finances: Failure to stabilise general government debt/GDP at a level close to or below the 'AA' median, for example, due to a return to fiscal deficits, or an assessment that contingent liabilities are likely to crystallise on the sovereign balance sheet

Structural Features: A sharp escalation of regional geopolitical tensions that threatens Qatar's economic and financial stability, for example, if it causes capital flight from banks or prolonged disruptions to Qatar's hydrocarbon and transport sectors

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Public Finances: Greater confidence that government debt will remain at a level close to or below the 'AA' median, for example, as a result of a prolonged period of fiscal surpluses, combined with a reduction of the risks associated with large contingent liabilities

External Finances: A substantial improvement in Qatar's external balance sheet to a level more in line with 'AA' rated regional peers', for example, through the build-up of sovereign assets combined with increased transparency on investments and a reduction in bank and other sector net external debt

Structural Features and Macroeconomic Policies: Improvement in structural factors such as reduction in hydrocarbon dependence and a strengthening in governance, while maintaining strong fiscal and external balance sheets

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

Strong Liquidity: QE reported an unaudited cash balance of USD24 billion at end-June 2022, which covered its total debt, mainly long-term balances, of USD15.7 billion.

Issuer Profile

QE is Qatar's oil and gas vehicle comprising the flagship Qatargas projects (seven JVs and an operating company) for LNG; production of natural gas for its own account; the production of crude oil and associated gas from the Dukhan onshore oil field and certain offshore oil fields through various production and development agreements with international oil and gas companies as well as other smaller upstream and downstream projects.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

The rating of QE is constrained by the sovereign rating.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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