Fitch Ratings has assigned
We rate the senior unsecured notes using a generic approach for 'BB' category issuers, which reflects the relative instrument ranking in the capital structure, in accordance with our Corporates Recovery Ratings and Instrument Ratings Criteria. While most of the company's debt will be represented by the secured reserve base landing (RBL), the company's leverage is low and it plans to focus on unsecured funding.
Harbour's 'BB' Long-term Issuer Default Rating (IDR) reflects (i) its increased scale of production following the completed acquisitions; (ii) low financial leverage and conservative financial and hedging policies; and (iii) a favourable tax position. At the same time, Harbour's 1P and 2P reserve life is lower than peers' (2P: seven years based on the 2020 pro-forma production), and its cost of production and decommissioning liabilities are high. We believe that Harbour should be able to maintain broadly stable production from the current asset base in the medium term. Its longer-term performance will depend on its ability to pursue M&A opportunities or transfer contingent resources (2C) into reserves.
Key Rating Drivers
Largest UKCS Player: After acquiring
Low Reserve Life: Harbour's reserve life is lower than peers. In 2020, its 2P reserve life based on the pro-forma production stayed at seven years, lower than that of
While Harbour should be able to maintain relatively stable production in the medium term from the current reserve base, its production potential over the longer term will depend on its ability to replenish reserves organically and through acquisitions.
High Costs, Low Taxes: Harbour's current cost position of
Conservative Financial Policies: Harbour targets maintaining net leverage (defined as net debt to EBITDAX) below 1.5x through the cycle. Our projected FFO net leverage below 2.0x over 2021-2024 is commensurate with the company's target, although we recognise that leverage could be affected by potential acquisitions. We assume dividends will be paid in 2022-2024 but note that the company is yet to formalise its dividend policy.
Moderate Capital Intensity: We assume Harbour's capital intensity to be moderate relative to peers at around
Hedging Policies Positive: We view positively Harbour's hedging policy, which should protect its cash flows in case of a significant drop in oil and natural gas prices. We estimate that currently 36% of its liquids production and 57% of its natural gas production in 2022-23 are hedged at an average price of
Addressing Energy Transition Risks: We assume that at least in the next three to five years the impact of energy transition on oil and gas companies will be limited. However, over the long term, industry participants, and in particular pure upstream players, may be subject to more vigorous regulations, and their margins could be affected by carbon taxes and other regulatory measures. We view positively Harbour's target to become carbon neutral on the Scope 1&2 basis by 2035 through minimising emissions and investments in carbon offsets.
High Decommissioning Obligations: Harbour has an ESG Relevance Score of '4' for 'Exposure to Environmental Impacts' due to high decommissioning liabilities, which negatively affect the company's cash flows.
Harbour's pro-forma decommissioning liabilities at end-2020 were high at around
Derivation Summary
Harbour's level of production (pro-forma 2020: 234kboe/d) is comparable with that of
Key Assumptions
Brent price of
TTF price of
Production volumes averaging around 200 kboe/d through 2024
Capex (excluding decommissioning) averaging approximately
Dividends paid out from 2022
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Material improvement in the business profile (e.g. much higher proved reserve life and lower production costs) while maintaining a conservative financial profile (FFO net leverage below 1.5x)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO net leverage consistently above 2.0x
Falling proved reserve life
Falling absolute level of reserves
Consistently negative FCF after dividends
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 '
Liquidity and Debt Structure
Strong Immediate Liquidity: Harbour's capital structure is dominated by a senior secured RBL facility maturing in 2027 with current availability of
ESG CONSIDERATIONS
Harbour has an ESG Relevance Score of '4' for 'Exposure to Environmental Impacts' due to high decommissioning obligations, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
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
Issuer Profile
Harbour is a medium-scale independent oil and gas producer with assets mainly in the UKCS.
Date of Relevant Committee
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.
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
senior unsecured
LT BB New Rating RR4 BB(EXP)
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
(C) 2021 Electronic News Publishing, source