Fitch Ratings has affirmed Aker BP ASA's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'.
The Outlook on the IDR is Stable.
Aker BP's rating reflects its operational scale with a production guidance of 430-460 thousand barrels of oil equivalent per day (kboepd) for 2023, asset diversification across the Norwegian Continental Shelf (NCS), an adequate reserve life, a strong project pipeline and a supportive capital allocation framework.
The company's rating remains constrained by its focus on offshore operations, which entail higher operational risk than onshore operations, and neutral-to-negative free cash flow (FCF) linked to major expansion projects including Valhall and Yggdrasil over the medium term.
Key Rating Drivers
Financial Flexibility Supports Growth: Fitch forecasts EBITDA of close to USD13 billion for 2023, and for it to reduce to USD6 billion by end-2026 based on our price assumption of USD53/barrel from 2026. Even under this conservative price scenario operating cash flow will be more than sufficient to fund its USD20 billion investment programme, given full tax deductibility of investments under the special tax regime for oil & gas in Norway. Due to the progressive dividend policy, with an ambition of minimum 5% growth per year, we forecast funds from operations (FFO) net leverage to rise to around 2.0x by 2026, from 0.5x at end-2022.
Financial Policies Support Rating: Aker BP's capital allocation priorities are i) to maintain financial flexibility and an investment-grade credit rating, ii) profitable growth and iii) dividends that are in line with long-term value creation. It aims to maintain company-defined net debt/EBITDAX below 1.5x. If hydrocarbon prices moderate to significantly lower levels over the long term we would expect the company to update its dividend policy to align with value creation of the business.
Strong Project Pipeline: Aker BP has a strong project pipeline with projects that will enable it to significantly increase its reserve base, most importantly, in the Yggdrasil area. The company projects to develop a total of 770 million barrels of oil equivalents (mmboe) in (net) recoverable petroleum resources. In 2022 Aker BP reported proved reserves of 1,251 mmboe (1,859 mmboe on a 2P basis). Based on 2023 production guidance, Aker BP's reserve life is adequate at 7.7 years for proved reserves (1P) and 11.4 years for proved and probable reserves (2P).
Low Production Costs: Aker BP's production costs decreased to USD8.7/boe in 2022 from USD9.2/boe in 2021, due to its increased exposure to low-cost, high-quality assets following the Lundin acquisition on 30 June 2022. Input price pressures, resulting not only from general inflation, but particularly oil & gas industry-specific rises linked to step-up of investments to promote energy security, are driving higher future production costs. However, we expect 2023 production costs for Aker BP to be lower at USD7-USD8/boe, capturing efficiency measures and a full year of production from the Lundin assets.
Largest Independent Producer in Norway: Aker BP is the largest independent oil and gas producer on the NCS, which according to the Norwegian Petroleum Directorate, holds 18% of total oil reserves in the country and 8% of total hydrocarbon reserves. In 2022, it produced on average 309.2 kboepd, a 48% higher run-rate than 2021, driven by the Lundin acquisition. However, its single jurisdiction focus implies limited geographic and hydrocarbon diversification, which remains a rating constraint.
Energy Transition Underway: Aker BP has very low scope 1 emissions with carbon intensity of production of below 3 kg/boe, target methane intensity below 0.1% and no scope 2 emissions (from 2023 full renewable power sourcing). Around 83% of the company's operations have been electrified. Its decarbonisation strategy aims to expand electrification towards 100% by 2040, implement energy- efficiency emission reductions over time and achieve net zero scope 1 and 2 emissions by 2030 by neutralising any residual emissions with high-quality carbon removal projects.
Derivation Summary
Aker BP is well-positioned versus independent exploration and production investment-grade peers, including Wintershall Dea AG (BBB/Stable) and Diamondback Energy, Inc. (BBB/Stable).
Aker BP's production mid-point guidance for 2023 of 445 kboepd compares well with Wintershall Dea's of 338 kboepd (excluding Russian assets) and Diamondback Energy's 435 kboepd. Aker BP's assets are concentrated on the NCS (1P reserves of 1,251 mmboe) and Diamondback Energy's in the Permian-basin in the US (1P reserves of 2,033 mmboe). Wintershall Dea has wider geographic diversification across the portfolio (1P reserves of 996 mmboe).
Our forecast for Aker BP indicates negative FCF over the next four years, whereas for Wintershall Dea we assume neutral FCF and for Diamondback neutral-to-positive FCF.
Higher-rated US peers Pioneer Natural Resources Co. (BBB+/Stable) and Devon Energy Corporation (BBB+/Stable) have higher reserves and production of 685 kboepd and 653 kboepd respectively (2023 guidance), but have similar reserve life at 8.5 years and 7.6 years with neutral-to-positive FCF generation and very low leverage.
These companies have more flexible dividend policies, with a fixed component that increases from year-to-year (similar to Aker BP, but in proportion to earnings the base is lower) and a variable component that is linked to FCF. This is a safeguard to preserve positive FCF and promote incremental debt reduction over time.
Many upstream oil & gas companies in the US target gross debt reduction to mitigate increasing business risks linked to the energy transition and limited options for them to reduce scope 3 emissions from use of their product. These companies maintain very low leverage, while gearing will increase for Aker BP due to its growth investments over 2023-2027.
Outstanding debt for all these companies could be repaid from cash flow generation over the medium term if macro conditions weaken for the wider oil & gas sector but the horizon for Aker BP to repay its debt would be longer, particularly given a high tax burden in Norway.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Base-case assumptions for Brent at USD85/bbl in 2023, USD75/bbl in 2024, USD65/bbl in 2025, USD53/bbl over the longer term
TTF gas price at USD20/mcf in 2023 and 2024, USD10/mcf in 2025, USD5/mcf thereafter
Upstream production averaging 440 kboepd over 2023-2027
Capex, excluding exploration and decommissioning, averaging around USD4.5 billion per year over 2023-2027
Dividends of around USD1.4 billion-USD1.6 billion per year in 2023-2027
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Material improvement in the business profile, including scale and diversification
Financial policies that support a more conservative financial profile through the cycle, including a more flexible dividend policy
FFO net leverage below 1.0x or EBITDA net leverage below 0.5x on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO net leverage well above 2.0x or EBITDA net leverage well above 1.5x on a sustained basis
Aggressive M&A, dividend payments or other policies materially affecting the credit profile and leading to consistently negative FCF
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: At end-1Q23 Aker BP's liquidity was USD6.68 billion, including cash and cash equivalents of USD3.28 billion and an undrawn revolving credit facility of USD3.4 billion that is available until May 2026. It has no debt maturities until January 2025.
Fitch rating case indicates negative FCF over the medium term linked to sizeable capex and increasing dividends. Aker BP targets to maintain a minimum liquidity buffer of USD3 billion at all times. As a result, we would expect the company to raise additional funding by early 2025.
Issuer Profile
Aker BP is the largest independent exploration and production company operating on the NCS.
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.
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
AKER BP ASA 
